Invesco India Focused 20 Equity NFO: Should you invest?

During these volatile markets, when fund managers would want to diversify and spread their risks, Invesco India seems to be headed the other way. It has just rolled out a scheme that would invest in just 20 stocks. The scheme is open for subscription; the new fund offer (NFO) ends on September 23.

 The scheme

Under the existing regulatory framework, a focused fund can invest in a maximum of 30 stocks at any given point of time. This is a key differentiating feature from other diversified or plain-vanilla equity schemes. The latter don’t have any stipulated cap on the number of stocks.

Invesco India Focused 20 Equity (IIF20) have a multi-cap portfolio. Initially, the scheme will have a larger allocation to large-cap stocks. However, the allocations can change depending on the fund manager’s view.

"Currently, a large portion of the portfolio will be invested in large-cap stocks (approximately 50 per cent-70 per cent); exposure to mid-cap stocks will be in the range of 30-50 per cent, while the proportion invested in small-cap stocks will be in the range 0-20 per cent of the portfolio,” says Saurabh Nanavati, chief executive officer, Invesco MF.

 What works

A focused fund comes with a concentrated portfolio of stocks. A fund manager is required to take high-conviction calls to outperform with a small set of stocks. In a typical focused fund, a high-conviction stock bet can be 5-10 per cent of the scheme’s corpus. If such stock bets do well, it can translate to sharp returns for investors.

Invesco’s focused fund will be managed by Taher Badshah, chief investment officer-equities of the house. Badshah comes with a proven track record. Before he joined Invesco, he had managed the Motilal Oswal MOSt Focused 25 and Motilal Oswal MOSt Focused Midcap 30 funds.

Focused funds, if managed well, can yield good results as a performing stocks can lift the entire scheme’s fortunes up. In polarized markets such as the ones we have been witnessing in recent years, focused funds tend to do well. Plain-vanilla diversified schemes can sometimes end up with bloated portfolios – partly on account of their gigantic sizes – with a long tail of stocks that have marginal allocations. While some of these stocks may see strong performance, investors may not benefit as the fund manager would have made minimal or negligible investment in the stock.

What doesn’t work
Portfolio concentration can also come to haunt investors, if stock calls don’t work as is expected. Investor returns can see sharp erosion if a large bet of a fund manager runs into any trouble. The factors for a sharp fall in price of a stock can range from weak financials, selling by a large institutional investor or a corporate governance issue. To be sure, the fund house would look to minimise such challenges through its risk management processes.

Moneycontrol’s take

Investing in a focused fund can be tricky. The performance of a focused fund largely depends upon the fund manager’s ability to spot stocks that can potentially see significant re-rating in valuations. If the fund manager gets his stock-selection right, investors would gain from outperformance when markets run-up, but it can also backfire as pointed out above.

While Badshah is a good stock-picker, any NFO’s major drawback is the lack of a track record. There are a number of focused schemes with proven track records, which investors can choose.

For now, investors can skip the scheme till it builds a track record.