Investing in focused funds through systematic investment plans (SIPs) now is wise given the current market conditions of sector rotation and high valuations. As these funds concentrate their investments in a limited number of stocks, SIPs will help mitigate this risk by spreading the investments over time.
Focused funds typically invest in a concentrated portfolio of stocks, often in high-conviction investment ideas. By investing in these funds through SIPs, investors can gain exposure to potentially high-growth areas of the market while managing risk through regular investment and diversification.
Concentrated approach
These funds, with their concentrated portfolio of high-conviction stocks, offer the potential for superior returns by allowing fund managers to meticulously select a limited number of quality companies. This approach enables a sharper focus on the best investment opportunities. The concentrated approach can lead to superior returns if the chosen stocks perform well. However, it also increases the risk since the success of the fund heavily depends on the performance of a few key investments.
SIPs, therefore, mitigate the impact of market volatility by spreading investments over time, thus benefiting from rupee cost averaging. So, the combination of a concentrated investment strategy with SIPs offers a robust avenue for investors seeking to harness
the potential of high-growth companies while managing market risks effectively.
Nirav Karkera, head, Research, Fisdom, says SIPs reduce the impact of entering the market at peak valuations and helps navigate the volatility that comes with concentrated portfolios. “In a market where stock and sector rotations are frequent, SIPs ensure consistent investment, positioning you to capitalise on future corrections and sectoral rebounds, ultimately optimising long-term returns while managing risk,” he says.
Similarly, Anil Rego, founder, Right Horizons, says focused funds are designed for investors with a longer investment horizon. “By starting an SIP now, you can benefit from compounding returns over time. Given that markets can be unpredictable in the short term, a long-term perspective often helps in weathering market fluctuations,” he says.
Longer investing horizon
Focused funds are suitable for long-term investors who seek higher returns and are comfortable with higher risk. As these funds take highly concentrated bets, the ideal investing period should be at least five years or more.
Anirudh Garg, partner, Invasset, says the extended horizon is crucial to fully realise the potential benefits of the concentrated investment strategy employed by focused funds. “The selected high-conviction stocks within these funds often require time to reach their growth potential, particularly if the portfolio includes mid-cap and small-cap stocks that may experience significant volatility in the short term but offer substantial growth opportunities in the long run,” he says.
It also aligns with the fundamental principles of focused funds, which aim to capitalise on the intrinsic value and growth prospects of a carefully curated selection of companies. It provides fund managers the flexibility to implement their high-conviction strategies effectively, ensuring that the underlying investment thesis for each stock can fully materialise.
What to keep in mind
Focused funds tend to be more volatile due to their concentrated nature. Investors should be comfortable with potential short-term fluctuations in value. “A skilled manager with a successful track record of high-conviction stock picks is crucial for the success of a focused fund,” says Karkera.
Investors must understand the fund manager’s investment philosophy and approach to stock selection. They should review the number of stocks in the portfolio and the degree of diversification. Checking for sectoral biases and ensuring the portfolio is not overly exposed to any single sector is important as it can heighten risk if that sector underperforms. “Evaluating the fund’s historical performance, expense ratio, and consistency in delivering returns is essential,” says Garg.
