Focused Funds: Definition, Features, and Benefits

Focused funds can be defined as a mutual fund that invests only in a selected number of stocks. According to SEBI guidelines, focused funds have to invest up to a maximum of 30 equity stocks. Additionally, being a type of equity mutual fund, focused funds are required to invest at least 65% of their assets into equities and equity derivatives.

Similar to multi-cap funds, this type of mutual fund can also invest in any 30 equity stocks regardless of their market capitalisation and sector. Focused funds are popularly known as ″Best Idea Funds″ and the main purpose of these schemes is to achieve maximum returns by investing only in top 30 high-performing stocks irrespective of their market cap.

As per SEBI guidelines, focused funds invest a minimum of 65% of their corpus on equity and equity-related instruments. However, these mutual funds do not have to stick to equities belonging to a particular market cap unlike large-cap funds, mid-cap funds, or Smallcap funds. Fund managers operating focused fund investments can invest in funds regardless of their sector, industry, market capitalisation, or any other segment.

Focused funds, therefore invest in stocks that have the potential to generate high returns. On that note, focused funds can be potentially volatile especially in the short term due to their equity oriented portfolio. Additionally, the relatively low number of stocks in the portfolio of a focus fund also leads to potentially high concentration risk for investors. So, this type of investment is considered suitable for seasoned investors with high-risk appetite who are willing to stay invested in the long term. New investors or those with a low-risk appetite should refrain from investing in focused funds and consider schemes with a more diversified approach like multi-cap funds, flexicap funds or even ELSS tax saver schemes.

Now that you have an idea of focused fund definition and its working, let's check out its features, taxation, and benefits.

Following are a few important features of focused funds that prospective investors should keep in mind:

The applicable tax on mutual funds primarily depends on whether a specific scheme is considered as an equity-oriented mutual fund or a non-equity scheme such as a debt mutual fund. As equities form a major portion of the portfolio, the taxation of gains from focused funds is as per equity mutual fund taxation rules based on the holding period of the investment. The tax implications for capital gains from focused funds are given below:

• If you redeem your focused fund units with 12 months from the date of investment, the gains will be taxed as per short-term capital gains rules. So, investors must pay a 15% STCG tax from their total gains.
• If your holding period of focused fund units is more than 1 year from the date of investment, you must pay a long-term capital gain tax of 10% on equity gains for any amount exceeding ₹1 lakh in the applicable financial year.

Dividends obtained from focus funds is also completely taxable in the hands of the investor. Any dividends received are added to the taxable income for the applicable fiscal under the head - Income from other sources. This is subsequently taxed as per the income tax slab rate of the investor for the applicable financial year.

Here are the key benefits of investing in focused funds that investors should keep in mind when choosing their investment options:

Before you start your focused funds investment, here are some tips that will help you through your investment journey: