Focused funds are a category that includes a smaller range of mutual funds’ investments in inventories. With this investment scheme, instead of a diverse mix of stock positions, funds are concentrated on the limited variance from only a few sectors.
These funds mainly hold positions in approximately 20-30 companies, whereas other funds hold positions in more than 100 companies. Their mandate to choose a limited number of companies to purchase inventories is also called the “best idea funds.” The main objective of these funds is to generate maximum profits through investments in high-performance assets.
What is the objective of Focused Fund?
One of the main advantages of investing in common mutual funds is to promote capital investment diversity. The majority of mutual funds invest in many companies that have pre-determined weights to save investors from the difficulty of selecting each security. Now, while this diversification helps investors to maximize returns while minimizing risks and volatility, they can also experience certain disadvantages on the other side.
Investments in various industries and enterprises, for example, may also be reduced because not all companies can simultaneously outperform. Targeted mutual funds primarily aim to distribute their holdings across a small number of carefully investigated capital and debt funds. While these funds don’t offer the advantages of diversifying funds, they rely on the perks of careful research into stocks.
Returns are therefore deemed more volatile from these funds. They are riskier than mutual funds that invest in a wide range of inventories but also deliver higher returns. Alternatively, they are also called “concentrated funds” or “under-diversified funds.”
The taxes on these funds are similar to the tax consequences of mutual funds. For example, these funds can invest for a limited number of companies in tax-saving equity, non-tax saving equity funds, debt funds, SIPs, etc. The tax consequences for each investment are as follows:
- In terms of equity funds: Taxation of focused equity funds is subject to short-term or long-term capital gains. In that case, the equity funds exceed Rs. 1 lakh in long-term capital gains or LTCGs; they are subject to 10 percent tax. Now the fiscal saving capital funds have a 36-month lock-in period, which puts all profits in the long run. They are therefore known as equity saving funds. The short-term capital gains or STCG shall be taxed at 15% if units have been redeemed before 1 year is completed.
- In terms of debt funds: Long-term debt fund capital gains are taxed at 20% after indexation. Indexation involves inflationary growth over the period between the purchase of funds and sales.
Who can invest in Focused Funds?
Investments in focused equity funds are typically intended for veteran and high-risk investors. Because the funds are considered to be more volatile, investors should not invest in them if they are seeking safe investment options.
However, these funds should gain more momentum in the future, despite the risks they present. They can help investors maximize their investment gains by promising higher returns than other mutual funds. Furthermore, these funds are much more effective in bringing high returns to investors because they invest only in several carefully chosen schemes.
Pros of Focused Funds:
- Very well investigated investments: Fund managers have thoroughly selected investor research companies before they can deliver maximum returns for them. The company’s in-depth evaluations benefit investors to a considerable extent.
- Higher returns: Although these investments are high risk, they can deliver maximum profit. Investors can maximize capital gains more effectively with focused mutual funds.
- Analyzes mutual fund limits: As mutual funds do not separate businesses and sectors, they can reduce returns by investing in inadequate inventories. With the focused funds, however, investment is limited to the selective firms’ stocks and therefore dismisses the restriction of mutual funds.
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