Reviewed by Aug 27, 2020| Updated on
A focused fund is a mutual fund which holds a relatively small number of stocks or bonds in some dimensions that are identical. Through definition, in a limited number of sectors, a concentrated mutual fund focuses on a limited number of stocks rather than holding a large or varied mix of positions.
In comparison to many funds holding positions well over 100 companies, focused funds tend to hold positions in about 20-30 companies or less.
What Does a Focused Fund Do?
A focused fund is a mutual fund category that invests in a small number of securities that are in some way related to each other. For example, a sector fund will hold only stocks in a particular segment of the industry that has been carefully investigated for inclusion. Focused funds give precise exposure to the market rather than a broad portfolio of diversity.
Focused funds divide their portfolios among a limited number of securities that have been carefully researched. Due to the "look for quality" approach, they do not experience the benefits of diversification.
On the other hand, oriented funds rely on research skills for the above-average stock picking. Results appear to be more unpredictable. This fund is also termed as a "concentrated fund" or "under-diversified fund".
Pros and Cons of a Focused Fund
Mutual funds are frequently marketed as a good way to diversify an investment portfolio. However, most mutual funds are designed to hold a position in a large number of companies, with different predefined weights, saving the investor the hassle of individually choosing and protection. This diversification makes it possible for an investor to access the equity risk premium while minimizing volatility and risk.
Some investors, however, feel that diversification can also limit returns by spreading money from companies or multiple sectors, not all of which are likely to outperform simultaneously. If an investor feels strongly that a certain industry or sector will soon outperform, by concentrating investments in that sector, he or she can increase returns.