Top Focused Mutual Funds to Consider for Investment in March 2025
Many investors believe that a concentrated portfolio has the potential to generate higher returns. They argue that some mutual fund schemes offer average returns due to their highly diversified portfolios. For those who prefer a more focused investment approach, focused equity mutual funds may be an ideal choice.
Understanding Focused Equity Mutual Funds
According to SEBI guidelines, focused equity mutual funds need to hold a concentrated portfolio of up to 30 stocks. In contrast to other equity mutual funds, these schemes do not place any limits on investment on the basis of market capitalization or sectors. Analogous to flexi-cap funds, they can invest in different segments of the market.
As these schemes have a limited number of stocks, fund managers make investment decisions with conviction and give substantial exposure to select stocks. If the investment choices prove to be right, such funds can provide huge returns. But if the choices are poor, the effect on the overall performance of the fund can be dramatic. This makes focused funds a high-risk, high-return investment.
Also, the performance of such funds relies heavily on the manager’s skill at picking profitable sectors and market directions early in time. If the market takes a turn in favor of the stocks selected, the scheme will deliver phenomenally. Otherwise, if the sector or stock choices are wrong, then it can result in heavy losses. Because of the focused nature of such investments, investors have to be ready to face big swings in returns.
Who Should Invest in Focused Mutual Funds?
Investors with high risk tolerance and a seven-year investment horizon can invest in focused mutual funds. Because of their volatile nature, these funds are more appropriate for investors who can tolerate short-term market volatility for the sake of potential long-term returns.
Top Focused Mutual Funds to Invest in March 2025
Based on specific selection criteria, the following focused mutual funds have been identified as top choices for March 2025:
- 360 ONE Focused Equity Fund
- SBI Focused Equity Fund
- Sundaram Focused Fund
- Quant Focused Fund
Performance Trends
A recent trend in performance suggests that the SBI Focused Equity Fund has shifted from the fourth quartile to the third quartile for the last few months. Likewise, the Sundaram Focused Fund has been in the third quartile for the past three months after having been earlier in the fourth quartile.
Methodology for Selection
These funds are shortlisted on the following parameters:
1. Mean Rolling Returns: Rolling returns for the last three years on a daily basis have been examined to measure fund performance.
2. Consistency of Performance: The Hurst Exponent (H) has been employed to determine the consistency of a fund’s NAV movements. A higher value of H represents low volatility, whereas a higher H value represents lower predictability.
- When H = 0.5, the returns are geometric Brownian motion and thus hard to predict.
- When H < 0.5, the returns have a mean-reverting behaviour.
- When H > 0.5, the returns have a trend that is persistent with a stronger up or down trend.
3. Downside Risk: This measure takes into account only the negative returns produced by the mutual fund scheme, computed through the following formula:
- X = Returns less than zero
- Y = Sum of squares of X
- Z = Y / number of days taken into consideration for computation
- Downside Risk = Square root of Z
4. Outperformance Measure (Jensen’s Alpha): The choice process involves the evaluation of Jensen’s Alpha for the last three years. This measure compares the risk-adjusted return of a fund with the anticipated market return. The higher the Alpha, the better the performance in comparison to market expectations.
5. Asset Size: Only mutual funds with equities having at least Rs. 50 crore AUM are included in this list.
Conclusion
Investors who seek higher returns on investment through a concentrated fund will be attracted to focused mutual funds. They have to be prepared to take greater risks involved in these types of investments. Ongoing monitoring of the performance of the funds and market trends is important to make intelligent decisions about investments. Investors can receive monthly updates about these funds and remain informed about their investments.
