Is it a good time to invest in focused mutual funds?

Is it a good time to invest in focused funds?

• Focused mutual funds attract interest amid stock-specific markets
• These funds invest in up to 30 high-conviction stocks
• High risk and return potential suit long-term, risk-tolerant investors

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As equity markets turn increasingly selective and stock-specific, focused mutual funds are quietly regaining investor attention. Unlike diversified equity schemes that spread investments across dozens of companies, focused funds run concentrated portfolios  betting on a limited number of high-conviction ideas to generate returns.

A focused fund can invest in up to 30 stocks, with the flexibility to allocate across market capitalisations and sectors. This structure allows fund managers to actively shift exposure between large-, mid- and small-cap stocks depending on opportunities, making them structurally similar to multi-cap funds but with far fewer holdings.

The difference lies in concentration. While diversified funds may hold 50–100 stocks or more, focused funds aim to outperform by allocating more capital to their strongest investment ideas. This higher concentration increases both return potential and risk, making the category more suitable for investors with a higher risk appetite and longer investment horizon.

Why focused funds are gaining relevance now

Market conditions are playing a key role in reviving interest in this category. After a broad-based rally in recent years, equities are increasingly moving in pockets rather than in unison rewarding stock selection over sector or market-wide bets.

“It is actually a stock picker’s market right now. Within each sector you will find opportunities, which is why focused funds are doing very well,” said Gautam Kalia, Chief Investment Solutions Officer, Mirae Asset Sharekhan.

The strategy becomes advantageous when market performance diverges sharply across companies.

“Focused funds have a higher active share because they hold fewer stocks, and that helps when market movements are becoming very stock specific,” Kalia added.

A shift toward concentrated portfolios

Wealth managers are also increasingly recommending selective exposure rather than broad thematic bets. In volatile or range-bound markets, concentrated portfolios can capture alpha more efficiently if stock selection is strong.

“Rather than pushing broad themes to clients, we are telling them to stick to more concentrated portfolios and specific holdings. In our core and satellite portfolio approach, tactical allocations over the last six to eight months have largely been through concentrated bets, including focused category funds,” Kalia said.

The ability to dynamically allocate across market caps further strengthens the appeal of focused funds. Managers can tilt portfolios toward mid- or small-cap opportunities during earnings cycles while maintaining stability through large-cap exposure when volatility rises.

Should investors allocate now?

Focused funds can potentially outperform during phases when markets lack clear direction and returns depend more on individual company performance than index momentum. However, concentration also means sharper drawdowns if stock calls go wrong.

For investors, the key lies in positioning these schemes appropriately. Focused funds may work best as a satellite allocation alongside diversified core holdings rather than as a standalone equity exposure.

In a market increasingly driven by fundamentals rather than broad liquidity rallies, the success of focused funds will ultimately depend on one factor  the fund manager’s ability to pick winners consistently.

For investors willing to accept higher volatility in pursuit of alpha, this could be a category worth revisiting now.