India's oldest fund house has launched a new focused scheme

UTI Focused Equity will look to buy stocks that are trading at reasonable valuations when compared to their growth potential

A focused equity scheme is the latest addition to UTI Mutual Fund (UTI MF). It is expected to fill the gap in its product offering. The new fund offer (NFO) is open for subscription between August 4, 2021, and August 18, 2021.

What is a focused fund?

A focused fund tries to find attractive investment opportunities and takes concentrated bets on them. If the fund manager gets it right, such a scheme could potentially deliver wide outperformance over the benchmark indices.

How many stocks can the fund invest in?

SEBI norms state that focused equity funds can invest in up to 30 stocks at any given point of time. In such funds, the fund managers tend to take high conviction calls.

Not necessarily. With the flexibility to choose from 30 stocks, the fund manager can potentially spread his investments across various sectors and market caps. So, there is enough room for diversification even in a focused fund.

"A fund manager can build a well-diversified portfolio with 30 stocks to manage volatility and give stability to the portfolio," says Vinod Jain, principal advisor and founder of Jain Investment Planner.

A focused equity fund can also avoid over-diversification. If a scheme's corpus is spread across too many stocks, the portfolio might not have any meaningful exposure to some shares. So, even if an investment idea does well, the portfolio will not gain as much.

"In the recent rally, several stocks turned multi-baggers. Many schemes had them, but their exposure was low and therefore they didn't make any meaningful contribution to scheme returns," says Deepak Chhabria, chief executive officer and director at Axiom Financial Services.

What is UTI Focused Equity Fund's strategy?

UTI Focused Equity Fund's manager, Sudhanshu Asthana, says the fund will aim to invest a majority of its corpus in companies that have strong growth visibility and sustainable business models.

"We will look for companies that can largely fund their future growth through internal cash flows," Asthana says.

Usually high-growth stocks get traded at rich valuations, but Asthana says the fund will look to buy stocks that are trading at reasonable valuations when compared to the company's growth potential.

Adding to its growth-oriented strategy, the fund will look for companies that are in the middle of a transformational journey towards a better business model. Asthana cites the example of a large bank that is now working on building a more diversified loan book and trying to reduce stress due to corporate loans.

The fund will also look for opportunities in cyclical stocks, when available at attractive valuations.

"UTI MF has its own research and rating framework to pick our top stock ideas and the focused fund will be built around this," Asthana says.

He points out that there can be volatility in the short term in a focused fund. But volatility reduces in the medium to long-term, he adds.

How has the focused fund category done?

There are 26 focused equity funds with assets worth over Rs 77,763 crore.

The category average returns of focused equity funds have kept pace with their diversified peers in recent periods. For example, the focused funds category has given average returns of 52 percent over the past one year, which is more or less similar to what the flexi-cap category has delivered. Returns are more or less similar in the three-year period as well.

Having a focused equity fund in your overall portfolio is a good idea, but only as an add-on to regular equity funds that must form the core of your portfolio.

UTI MF has a well-defined investment process. In some equity categories, the fund house's schemes have delivered strong returns over long periods. However, the UTI Focused Equity Fund will need some time to build its own track record.