Mutual Funds

Tata Focused Equity NFO: A multi-cap fund with concentrated bets

Parvatha Vardhini C | Updated on November 23, 2019 Published on November 23, 2019

The fund will invest in up to 30 high-conviction stocks across various sectors

Tata Focused Equity Fund is open for subscription until November 29.

The fund will invest in up to 30 high- conviction stocks with no market capitalisation bias or sector preferences.

Essentially, it will be a multi-cap fund which will take concentrated bets and follow a buy-and-hold’ strategy.

The scheme’s stock selection will be based on a bottom-up approach, following a ‘growth at a reasonable price’ strategy. The fund will be benchmarked to the S&P BSE 200 TRI.

Peer group performance

SEBI’s classification norms brought out in October 2017 define a focussed fund as one that invests a minimum of 65 per cent of its assets in equity and equity-related instruments and restricts itself to a maximum of 30 stocks.

It also requires fund houses to mention where the scheme intends to focus — large/mid/small/ multi caps. The latest NFO from Tata Mutual Fund is in compliance with these terms.

At the time of the reclasssification two years ago, Motilal Oswal Multicap 35, Axis Focused 25, DSP Focus, Sundaram Select Focus and Motilal Oswal Focused 25 were predominantly the ones with a similar strategy. While the first three have a multi-cap bias, the remaining two have a large-cap bias.

Over a longer term of five years, the multi-cap focussed funds have delivered 1-4 percentage points above the returns of the broad Nifty 500 TRI.

The large-cap oriented funds have delivered 2-4 percentage points over the bellwether Nifty 50’s returns.

Following the new categorisation norms, many of the existing funds were tweaked by asset management companies (AMCs) to fit into this category.

The erstwhile HDFC Core and Satellite, Franklin High Growth Companies, SBI Emerging Businesses and Aditya Birla Sun Life Top 100, for instance, are now focussed funds.

Comparing the long-term returns of these funds would not add meaning, considering the recent changes in their characteristics.

At least six fund houses — BNP Paribas, L&T, Mirae, Kotak, IDBI and Union — have come out with NFOs in the focussed funds category after the new classification norms came in. Their short track records mean that their mettle is yet to be tested.

Suitability

Thus, Tata Focused Equity is not a unique offering. Rupesh Patel, its fund manager, explains that the fund will invest in businesses that have a long runway for growth, that is, companies that are at an inflection point in the earnings-growth trajectory and provide value, but are not a value trap . In line with these tenets, banking and financial services, cyclical sectors as well as consumer discretionary stocks will be preferred in the near term.

Though some focussed funds tend to hold cash while waiting for the right opportunities, Tata Focused Equity will not take cash calls, according to the fund manager.

Investors should remember that focussed funds suit only those with an appetite for high risk.

Holding concentrated bets in high-conviction stocks will pay handsome returns if the stocks do well. At the same time, the downside risk is also high if the bets go wrong. Also, such bets may take time to pay off, which is why most of these funds have a low portfolio churn. Hence, only those investors who have a time horizon of at least 3-5 years need to consider this category of funds.

Published on November 23, 2019
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