This cyclicality is more relevant for focused equity funds, as these are concentrated bets as per the view of the fund manager or the stated investing theme. Investing in equity funds essentially means going with the fund manager’s calls on stock selection.
All mutual fund schemes go through cycles of performance. This is not only about the market’s bull and bear cycles, but also about mutual fund schemes, which are a basket of stocks with their unique nature and individuality. There are times when a particular industry or sector of the market is doing well, but a fund being a collection of multiple stocks, goes through its own unique cycles as well.
This cyclicality is more relevant for focused equity funds, as these are concentrated bets as per the view of the fund manager or the stated investing theme. Investing in equity funds essentially means going with the fund manager’s calls on stock selection. For an investor opting for focused funds, there is an understanding that he/she is more comfortable with concentrated bets over diversification within diversification i.e. selecting multiple funds with a large diversified portfolio.
The investment universe being considered here is largecap stocks or relatively largercap stocks. To understand the reason why focused equity funds are concentrated bets, we have to look at the Sebi framework that define the ground rules.
However, focused funds are about taking concentrated bets i.e. investing in a small number of high conviction names. From that perspective, even 30 is not restrictive. We can debate what the optimum level of diversification is, but as long as a portfolio is spread across industries and sectors, 30 is adequate.
these funds are unable to respond to the changing times and hence tends to underperform in the rest of the market cycle.
So, what is important is the fund manager’s ability to respond with ease to the shifts seen from time-to-time.
and have a performance track record. The optimal approach when investing in such a category would be to invest in a staggered manner through SIP or STP than trying to time the market.