Best focused mutual funds to invest in 2022

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Many investors believe that too many stocks in a portfolio dilute returns. In fact, that’s their pet peeve against mutual funds. They believe mutual funds end up with ‘modest’ returns because of their diversified portfolio of too many stocks. Such investors should check out focused equity schemes for their investments in the new year.

As per SEBI norms, focused equity mutual fund schemes are mandated to invest in a portfolio of maximum 30 stocks. These schemes have no restrictions when it comes to investing- like flexi cap schemes they can invest in any market capitalisations and sectors. If that investment strategy appeals to you, you can get to know more about focused equity schemes.

As you can see, these schemes run a concentrated portfolio. That means that the fund manager will choose stocks based on his or her conviction and take a meaningful exposure in the stock. Such investments can pay off handsomely if the call goes right. However, the investment strategy has its own share of risk. If a few calls go wrong, the scheme will suffer a lot. In such a scenario, a diversified portfolio may deliver better returns.

Similarly if the manager succeeds in identifying the sectors and market capitalisations ahead of the market, the scheme will benefit a lot. If the call goes wrong, the scheme will suffer a lot. Once again this is the peril of having a concentrated portfolio. You will gain a lot or lose a lot – depending on your stocks picking skills.

If you are ready to take more risk and an investment horizon of around seven years, you may invest in these schemes. Here are our recommended focused equity mutual fund schemes you can check out.

Best focused equity mutual funds

  • Axis Focused 25 Fund
  • IIFL Focused Equity Fund
  • SBI Focused Equity Fund
  • Motilal Oswal Focused 25 Fund

Methodology: has employed the following parameters for shortlisting the equity mutual fund schemes.

1. Mean rolling returns: Rolled daily for the last three years.

2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.

ii) When H is less than 0.5, the series is said to be mean reverting.

iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.

X =Returns below zero

Y = Sum of all squares of X

Z = Y/number of days taken for computing the ratio

Downside risk = Square root of Z

4. Outperformance: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.

Average returns generated by the MF Scheme =

[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}

5. Asset size: For Equity funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)

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