Investica’s Recommendation: A Focused Fund for Aggressive Investors

Focused Fund is an equity fund category created by SEBI when the re-categorization happened. But even before re-categorization, many fund houses had a fund with a strategy similar to the focused fund category. According to SEBI’s definition, the focused fund can invest in a maximum of 30 stocks. In this Investica’s Recommendation, we will look at such a focused fund with a successful history of more than 15 years.

SBI Focused Equity Fund – A Focused Fund for Aggressive investors

SBI Focused Equity Fund is a focused fund with the investment objective of:

Long term capital appreciation by investing in a concentrated portfolio of equity and equity-related instruments.  The Fund invests a minimum of 65% in equity & equity related instruments spanning across market capitalisation.

Let’s look at the details of this fund and why this fund is suitable for an aggressive investor.

Performance

As we have mentioned earlier, downside protection is one of the most important aspects of equity funds. Selecting a fund that successfully managed downside will help your portfolio grow faster than the index. Let’s see how SBI Focused equity’s performance has been:

In bull markets, every equity fund goes up however in bear markets the same equity fund should be able to protect your investment to the extent possible. Over last year, the S&P BSE 500 index fell by 21.54%. However, the SBI Focused Equity Fund fell by 13.94%. Similarly over the long term as well, the fund is able to outperform both the index as well as the peers.

We have compared this fund’s returns with a multi-cap fund average returns as the underlying strategy of this fund is similar to multi cap funds. The only difference being the number of stocks held in the portfolio.

Portfolio

As we mentioned earlier, the SBI Focused Equity Fund is a focused fund that can invest across market capitalization. So it acts as a multi cap fund. However, multi cap funds have fairly diversified portfolios with 40-50 stocks. Focused funds have a mandate of investing up to 30 stocks. Hence these portfolios are concentrated.

As per the fund house’s disclosure, the fund follows bottom-up stock to select fundamentally good stock where the fund manager has very high conviction. The sectoral breakup of the underlying portfolio for SBI Focused Equity Fund looks like this:

As we get into the details of the portfolio, the reason for outperformance over benchmark and category gets clear. Currently the portfolio has about 70% exposure in large caps, 22% in Midcaps, and 7% in Small cap stocks. The exposure in large caps is slowly increased from 2018 from 30% to 70%. In 2018, mid and small-cap stocks were at an all-time high. Exiting at high valuations from mid and small caps and entering less risky large caps has helped with the long term performance of the fund.

Fund House

SBI Mutual Fund is a joint venture between State Bank of India and AMUNDI (France). In this agreement, SBI holds a 63% stake in SBI Funds Management Pvt. Ltd and AMUNDI holds a 37% stake.

SBI Focused Equity Fund is managed by :

• Mr. R Srinivasan (Head of Equities) – Managing the Fund since May 2009.

Should you invest in this focused fund?

Our heading for this blog says Focused Fund for aggressive investors. Let’s look at why. With only 24 stocks in the portfolio, SBI focused equity follows a concentrated strategy to manage the portfolio. When there are lesser stocks in the portfolio, the exposure to each stock increases. With such high exposure, even if one stock goes down, the impact on NAV tends to be higher.

Hence, the risks associated with focused funds are fairly higher compared to normal diversified multi cap fund. Naturally, you should select this fund for your portfolio only if you have an aggressive risk appetite. This fund would fall in the High-Risk High Return bucket. Additionally, invest only if your investment horizon is more than 5 years.

We hope this helps you in making an informed decision on your investments.