Understand the difference between Mid-cap and focused equity fund

Understand the difference between Mid-cap and focused equity fund

For first-time mutual fund investors, there are a plethora of investment options to choose from. However, they must first approach financial planning and accordingly decide in which mutual fund scheme to invest in. The reason a lot of people are opting for mutual funds these days is that they offer true diversification by investing across various asset classes, markets, currencies, and economies to generate returns. Since these are professionally managed funds investors need not require any prior experience in investing. Mutual funds are ideal for investors with a long-term investment horizon as these funds have outperformed all other conservative investment products in the past. 

A lot of people are investing in equity mutual funds because they have offered better returns than all other mutual fund schemes. However, the risk in equity funds is very high and investors should understand this before investing. Under the equity mutual fund umbrella, there are several mutual fund products that investors can choose from. However, it might get confusing for new investors in determining exactly which scheme to choose. 

Equity funds are further categorized based on their asset allocation strategies. Some equity funds are based on the market cap which they tap into, some invest in a specific theme/sector, whereas a scheme like ELSS (equity linked savings scheme) comes with a tax benefit, and then other equity funds have their unique investment strategy. 

Today we are going to discuss two such equity funds that have a different investment approach – mid-cap funds and focused funds.

What is a mid-cap fund?

As mentioned earlier, some equity funds are based on market cap and mid-cap funds fall under this category, While large-cap funds invest in financially stable company stocks and small-cap funds target stocks of companies with small market capitalization, mid-cap funds sit right between these two equity funds. A mid-cap fund is an open-ended equity scheme that invests a majority of its investible corpus in equity and equity-related instruments of mid-cap companies. 

What is a focused fund?

While the fund manager of an equity fund has the leeway of investing in securities of various mid-cap companies, focused funds follow a slightly different approach. These are open ended equity schemes that invest in a limited number of stocks. As per SEBI mandate, a focused fund can only invest in a maximum of 30 stocks. This obligates the fund manager to only invest in certain stocks as compared to other equity mutual funds that can invest in a lot more stocks than that. 

Mid-cap funds v/s Focused funds: What’s the difference?

ParameterMid-cap FundFocused Fund
Risk profileMid cap funds mitigate investment risk by investing a basket of mid cap stocksSince a focused fund can only invest in a maximum of 30 stocks, the portfolio might face concentration risk
Asset allocationMinimum of 65% in mid cap stocks and the remaining as per fund manager’s investment decisionThe scheme can invest across market caps but restrict its investment to a maximum of 30 stocks
SectorsMajorly invests in mid cap sectorCan invest in any sector

Should I invest in a mid cap fund or a focused fund?

Investors must choose a fund whose investment objective aligns with theirs. If they wish to invest in a mutual fund that predominantly targets mid cap companies, they can invest in mid cap funds. On the contrary, those who wish to invest in a fund that invests only in limited stocks can consider investing in focused funds.

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