Individual investors are preferring to put money in focused funds that have a concentrated portfolio of high-quality stocks for generating alpha. The rise in net investments into focused funds despite the fall in the broader equity-oriented schemes in February indicates a shift in preference of investors toward quality over quantity.
Unlike diversified funds that spread investments widely, focused funds prioritise select stocks (around 20 to 30) that have strong fundamentals, growth potential, and resilience in uncertain markets. This enables better risk-adjusted returns, as fund managers can navigate volatility by dynamically allocating capital to sectors and companies expected to outperform.
In February, barring focused funds, all equity-oriented funds categories reported a dip in net flows. Association of Mutual Funds in India data show while net inflows into equity-oriented schemes dropped 26% in February as compared with January this year, net inflows into focused funds rose 65%.
The rise in net investments into focused funds during the month indicates that investors are seeking a balanced approach amid corrections in mid and small-cap fund.
Even returns from these funds are steady. In the last one year the average returns of five top performing focused funds is 17%, and for the last three years 19%. Around 80% of the total 28 focused funds have outperformed their benchmark in the last one year. In contrast, around 66% of the total 39 flexi-cap funds have outperformed the benchmark.
Nirav Karkera, head, Research, Fisdom, says investors are seeking actively managed, high-conviction portfolios to navigate uncertainty rather than spreading their capital thinly across a large number of stocks. “Investments in focused funds are likely to sustain momentum as markets remain volatile, and investors look for funds that can generate alpha through strategic stock selection rather than passive diversification,” he says.
Allocation strategy
Focused funds have no restrictions on market cap, allowing fund managers to focus on alpha while limiting downside risk. These funds operate on a bottom-up stock-picking approach, selecting a maximum of 30 stocks. Fund managers are currently leaning towards a high-conviction investment strategy, prioritising selective stock-picking over broad diversification.
A significant portion of focused funds’ portfolios is now allocated to large-cap stocks, which have historically provided more stability in uncertain markets. Data from Fisdom Research show that in February this year, the exposure to large-cap stocks rose to 73.5% as compared with 64.8% in October 2024. Fund managers have reduced the allocation to mid-cap stocks to 14% in February this year from 22% in October last year. Allocation to small-cap stocks is down to 12% from 13% during the same period.
Fund managers are looking for businesses that align with emerging market opportunities and demonstrate resilience, rather than following short-term sectoral trends. The ability to capitalise on upcoming economic shifts will be crucial in generating alpha. Nehal Mota, co-founder & CEO, Finnovate, says given the recent corrections in mid and small-cap stocks, fund managers have hiked their investments in high-conviction positions within these segments. “They may consider introducing new investment ideas to generate alpha, especially with the fresh inflows into the focused fund.”
What to look before investing
Sachin Jain, managing partner, Scripbox, says focused funds have concentrated portfolios, leading to higher risk. “Investors must ensure they have the capacity to tolerate potential volatility and these funds are better suited for long-term investors who can weather short-term fluctuations.”
They should review the fund’s past performance, its holdings, and the fund manager’s ability to generate consistent returns across different market cycles.