Top Focused Mutual Funds to Consider for Investment in February 2025

Many mutual fund investors believe that a concentrated portfolio can lead to higher returns. Some argue that mutual fund schemes with a highly diversified portfolio often deliver average returns. For investors seeking a focused investment strategy, focused mutual fund schemes could be an option worth considering.

Understanding Focused Equity Mutual Funds

As per SEBI guidelines, concentrated equity mutual funds can invest in up to 30 stocks. Unlike other categories of equity mutual funds, focused funds have no restrictions on sector or market capitalization allocation. This strategy is akin to flexi-cap schemes, where investment can be made in large-cap, mid-cap, and small-cap stocks.

As such, funds own a limited quantity of stocks; fund managers put money in based on a high conviction in a set of stocks, going big in them. In case the stock picks are right, such schemes can potentially generate high returns. But if certain stock picks perform poorly, the hit to the returns can be extreme because of the concentrated portfolio.

In the same way, the performance of the fund also depends to a great extent on the fund manager’s skill to spot potential sectors and market capitalizations. A timely investment in a hot sector can do wonders for the scheme, while a wrong calculation can result in heavy losses. The risk-reward ratio in concentrated mutual funds is greater than that of diversified equity funds, so they are appropriate for investors with a high-risk tolerance and a long-term investment horizon of seven years or more.

Top Focused Equity Mutual Funds to Invest in February 2025

Investors who are willing to accept higher risk in the hope of receiving a potentially higher return might look at the following suggested focused mutual fund schemes:

1. 360 ONE Focused Equity Fund

2. SBI Focused Equity Fund

3. Sundaram Focused Fund

4. Quant Focused Fund

It is significant to mention that the SBI Focused Equity Fund was in the third quartile last month, following an earlier stay in the fourth quartile. In the same vein, the Sundaram Focused Fund has been in the third quartile for two months, following an earlier stint in the fourth quartile.

Selection Methodology for Recommended Funds

The choice of these concentrated equity mutual funds is through an analysis of several performance factors so that only consistent and high-performing schemes are shortlisted. The below-given important parameters were applied:

1. Mean Rolling Returns

The rolling returns were computed daily for the previous three years to analyze long-term performance trends.

2. Consistency Over the Last Three Years

The Hurst Exponent (H) was employed to determine the consistency and volatility of a fund.

• If H is 0.5, it represents a random return pattern, and the future performance of the fund cannot be predicted.
• If H is below 0.5, it represents a mean-reverting pattern, where previous returns have an impact on future returns.
• If H is more than 0.5, then it shows a consistent return trend, and the higher the value of H, the stronger the trend.

3. Downside Risk

This measure evaluates only negative returns that have been produced by the fund. The formula applied is:

• X = Returns less than zero
• Y = Total sum of squares of X
• Z = Y / Number of days under consideration for calculation
• Downside Risk = Square root of Z

4. Outperformance (Jensen’s Alpha)

Jensen’s Alpha was applied to calculate the risk-adjusted return of a fund in relation to expected market performance, according to the Capital Asset Pricing Model (CAPM). Greater Alpha reflects improved outperformance.

Formula:

Average returns generated by the MF Scheme = [Risk-Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk-Free Rate)}]

Asset Size of the Fund

Only equity funds with assets exceeding Rs.50 crore were considered to ensure stability and scalability.

Focused mutual funds present a chance of increased returns but also mean increased risk with their focused portfolios. The investors need to cautiously consider their investment horizon and risk appetite before opting for such schemes. By diligent research and systematic investment, such funds can be an enriching inclusion in a long-term portfolio.

Investors should check their investments periodically and keep themselves informed of monthly performance patterns to make intelligent choices. The suggested funds will continue to be evaluated for performance consistency, and subsequent updates will indicate any variation in rankings or fund performance.