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Focused Equity Funds vs Diversified Equity Funds – Understand the Difference
Equity funds are popular investment options for investors looking to earn inflation-beating returns over the long term. However, not all equity funds are the same. While some equity funds invest across market caps and sectors, others take a more concentrated approach. In this blog, we compare focused equity funds and diversified equity funds to help you decide which aligns better with your investment goals.
What are Focused Equity Funds?
As the name suggests, focused equity funds invest in a concentrated portfolio of stocks. Instead of investing broadly across the market, these funds take high-conviction bets in specific sectors, market caps, or themes. For instance, Bandhan Focused Equity Fund invests predominantly in large-cap and mid-small-cap stocks. The concentrated approach allows fund managers to take sizeable exposure to their best investment ideas. At the same time, it also amplifies risks.
Key Features of Focused Equity Funds
- A concentrated portfolio of typically 30 stocks.
- High exposure to fund manager’s top stock picks.
- Higher volatility compared to diversified equity funds.
- Potential for higher returns owing to a few multi-baggers.
- Moderately high to high-risk profile.
However, the flip side is that such funds tend to be more volatile in market downturns as well.
What are Diversified Equity Funds?
In contrast to focused funds, diversified equity funds invest across market segments and sectors to create a balanced portfolio. The wider sector and market cap exposure allow risk to be diversified across multiple bets.
For instance, the Bandhan ELSS Tax Saver Fund has no cap or sector biases. It takes exposure across market caps with the twin objectives of wealth creation and mutual fund tax benefit under Section 80C.
Key Features of Diversified Equity Funds
- Invest across market segments and sectors.
- Typically hold 50-100 stocks.
- Lower volatility compared to focused funds.
- Market-linked returns over the long run.
- Moderately high to very high risk.
While slightly lower than focused funds, diversified equity funds tend to be more resilient during market declines.
Key Differences at a Glance
| Parameter | Focused Equity Funds | Diversified Equity Funds |
|---|---|---|
| No. of stocks | 30 | 50-100 |
| Portfolio concentration | High | Low |
| Volatility | High | Moderately High |
| Short term performance | Higher potential | Market-linked |
| Long term performance | Market-linked | Higher consistency |
| Key risk | Significant price fluctuations | Lower risk-adjusted returns |
Which Option Should You Choose?
Focused and diversified equity funds cater to investors with varying risk appetites. Here’s a quick checklist to determine which category better meets your requirements:
Consider focused equity funds if you:
- Have an aggressive risk profile.
- Aim to earn higher returns over the long run.
- Willing to endure volatility in the short term.
Diversified equity funds may be suitable if you:
- Have a moderately aggressive risk appetite.
- Seek less volatile equity exposure.
- Wish to take broad exposure to equity markets.
Additionally, focused equity funds attract an LTCG tax of 10% if redeemed after a year. Evaluate both scenarios to determine the choice better aligned with your investment horizon and goals.
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