The mutual fund industry in India provides various options for different risk profiles and investment goals. Investors often prefer focused and mid-cap funds for potentially higher returns.
In this blog, we will discuss focused funds and mid-cap funds and the differences between them, enabling you to make informed investment decisions.
What are Focused Funds?
Focused funds are a category of equity mutual fund that seek a concentrated portfolio, but with a SEBI-imposed limit of a maximum of 30 stocks. They provide exposure to a specific market rather than a diversified portfolio.
This aims at investing in high-conviction stocks or categories that have the potential to provide attractive returns in the future. For example, the Kotak Equity Opportunities Fund follows a concentrated strategy of picking high conviction stocks to maximize future returns.
What are Mid-Cap Funds?
Mid-cap funds need to have at least 65% of their assets invested in mid-cap Indian companies, i.e., companies ranked between 101st and 250th by their market capitalization in India.
These funds also aim to capture emerging growth trends in India and offer an investor the stability of large caps as well as the high-growth opportunities of small caps.
Differences Between Focused Funds and Mid Cap Funds
Some differences between focused funds and mid-cap funds are mentioned below:
Portfolio Composition
Focused funds are characterized by their concentrated investment approach with a maximum holding of 30 stocks according to SEBI rules. This enables the fund manager to allocate a large share to each stock selection. In contrast, mid-cap funds have a more diversified portfolio, usually investing in 40-65 companies within the mid-cap universe. This wider distribution mitigates the risks in the portfolio by reducing the effect of the bad performance of any specific stock.
Market Cap Exposure
The most important difference is their flexibility in terms of market capitalization. Focused funds are not limited to investing in any particular-sized company, whether that is a large-cap, mid-cap, or small-cap company; they provide the freedom to fund managers to dynamically allocate depending on their market outlook.
Conversely, the mid-cap funds have a strict requirement of maintaining at least 65% assets in the mid-cap companies.
Risk Profile
Focused funds inherently carry more risk than mid-cap funds since they are composed of fewer stocks. A poor selection impact is magnified in such concentrated portfolios, but the upside is also greater when the manager’s picks pay off. While mid-cap funds are also not risk-free, they have a relatively balanced risk profile because of their diverse holdings.
Return Potential
Focused strategy implies focused funds can deliver disproportionately high returns if the manager’s top picks perform exceptionally well, but there is an increased risk of losses if a few stocks underperform. The mid-cap funds are characterized by high growth opportunities in the long run due to the booming mid-cap markets in India.
Flexibility of Fund Managers
In Focused funds, there is flexibility to make asset allocation across different sectors and company sizes, which capitalizes on market volatility and mitigates the risks in the overall portfolio. On the other hand, mid-cap fund managers work in a regulated environment where the majority of the portfolio is invested in mid-cap stocks.
Conclusion
An investor’s investment horizon, risk tolerance, and financial goals will determine whether they select a focused fund or a mid-cap fund. Focused funds are a high-conviction, concentrated portfolio suitable for investors who have a high risk tolerance and can trust the fund manager’s stock selection skills.
Contrarily, mid-cap funds stay within a specific market niche while striking a balance between diversification and growth potential. Therefore, before any investment decision, every investor should do their research and analysis.
