Best focused equity mutual funds to invest in 2021

Focused mutual fund schemes are those equity mutual funds that follow a concentrated investment strategy with a limited number of stocks in their portfolio. This concentrated approach of investment helps these schemes to outperform their indices as well as their peers if the fund manager’s stock picking is good. However, the downside can be riskier for these schemes because of less diversification. If you are a long term investor with slightly higher risk appetite and want to bet on high conviction stocks, you can choose one of our recommended focussed funds to invest in 2021. According to SEBI mandate, focused funds can invest in up to 30 stocks with at least 65% of their assets invested in equities. These schemes can have different market capitalization. This means that focussed funds can be large cap, small cap, mid cap or multi cap. The concentrated approach of these schemes reduces the opportunity cost of under-allocating to good investment ideas and companies. In many cases, the tight portfolios reduce the risk of over-diversification, leading to higher returns. If you are a new investor and do not understand much about investing in mutual funds, it is better to stay away from focussed mutual fund schemes. If you do not have a very high risk appetite and looking to grow your investments without taking too much risk, you must stick to diversified equity funds with bigger portfolios and lesser risk. If you understand the risk involved in investing in focussed funds but want to bet on them for higher returns, advisors suggest you should have a long term investment horizon of 7-10 years. The risk increases with different market capitalisations also. Focussed funds investing in large cap stocks are less risky than those investing in mid cap stocks. If you don’t understand these terms, you should seek help from a seasoned mutual fund advisor. If you are convinced that these schemes are for you, here is a list of consistent performers in this category that you can choose from: Axis Focused 25 FundIIFL Focused Equity FundPrincipal Focused Multicap FundSBI Focused Equity FundMotilal Oswal Focused 25 FundIf you want to know our methodology, here it is: ETMutualFunds.com 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 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 <0.5, the series is said to be mean reverting.iii) When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.X =Returns below zeroY = Sum of all squares of XZ = Y/number of days taken for computing the ratioDownside risk = Square root of Z4. 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.)

from Economic Times https://ift.tt/381bm0s