When a scheme runs a concentrated portfolio, investors are exposed to high fund manager risk
Focused equity funds are known for their portfolios that contain high conviction picks. These schemes have the ability to move across shares of companies of all sizes. There are many investors who want to bite the bait of investing in the best ideas of a fund manager and benefit from top-of-the-chart returns, though there is no guarantee that it would work.
Mahindra Manulife Mutual Fund has rolled out a new fund offer. Called the Mahindra Manulife Focused Equity Yojana (MFEY), the scheme opened for subscription from October 26, 2020. Should you invest in it?
What’s on offer
MFEY is a focused fund that intends to offer a concentrated portfolio of 30 stocks as defined by the scheme categorization of the Securities and Exchange Board of India (SEBI). Krishna Sanghavi will be the fund manager. The NSE 500 TRI is the benchmark for the scheme. The fund house is one of the newest kids on the block, having started operations and launched its first scheme just four years back.
The scheme aims to build a portfolio of handpicked stocks after applying filters such as growth prospects of the business, strength of cash flow, quality of the management and valuations. Since there are a limited number of stocks (30) compared to a typical diversified fund, which holds around 50 or more stocks, there is more allocation on an average to each individual stock in a focused fund. If the fund manager gets the call right, then there is a fair chance of making better returns than most other diversified funds.
Since there is no restrictions on the fund manager in allocating to shares of companies of specific sizes or market capitalizations, there is more freedom to pick his stocks.
What doesn’t work
When a scheme runs a concentrated portfolio, investors are exposed to high fund manager risk. If the investment decisions of the fund manager go wrong, then the fund may underperform the broader indices and peers. Concentration simply amplifies both good as well as undesirable outcomes and hence such funds may not suit investors with a low tolerance for volatility.
What should you do?
MFEY is not the first focused equity scheme in the market. There are 23 focused equity schemes with assets worth Rs 52797 crore as on September 30, 2020, according to Value Research. Over the last one year, focused funds have given 2.44 percent returns on an average as a category. Since the NFO in question offers a strategy that is already available to the investors through existing focused funds, it makes sense to skip it for the time being. The scheme can be considered for investment, after it builds a healthy track record.The NFO closes on November 9, 2020.