Why this focused fund can be a worthy investment in heated markets

Focused funds have performed reasonably well in the market rally post the COVID-19 pandemic. Many funds in the category are large-cap oriented but have still delivered  better than broad-based benchmarks.

Large-cap orientation enables funds to stay relatively moderate on the risk front, given the massive rally in mid and small caps, with valuations shooting up way beyond the comfort zone.

Therefore, in the present market condition, a large-cap tilt may suit investors with an average risk appetite who are looking to save for the long term, but want a sprinkling of lower-market-cap stocks to light  up returns.

Market regulator SEBI mandates that focused funds to maintain a portfolio of not more than 30 stocks. While this number isn’t large enough, it is still possible to build a crisp portfolio without being too concentrated and risky if stock selection is sound.

The Mahindra Manulife Focused fund, which was rolled out in November 2020, has been among the best performers in its category and has consistently delivered outperformance over the benchmark. Investors can consider taking exposure to the fund for seven-plus years via the SIP route.

Consistent outperformance

When we take the point-to-point returns basis over the past one, two and three-year periods, the fund has outperformed its benchmark, Nifty 500 TRI, by 7-13 percentage points. Mahindra Manulife Focused fund has delivered 33.5 per cent returns annually since its inception, placing it favourably among the best in the broader diversified equity fund categories.

When one-year rolling returns over the period November 2020-September 2024 are taken, the fund has outperformed its benchmark over 100 per cent of the time.

The mean one-year rolling returns over the above-mentioned timeframe is 26 per cent for the fund, while the figure is 18.5 per cent for the Nifty 500 TRI.

When SIP returns over the past 45 months are taken, the fund has managed an XIRR of 33.2 per cent, which compares favourably with the top performers in the category. An SIP in the Nifty 500 TRI would have given an XIRR of 25.1 per cent over the same period.

Data from September 2021 to September 2024 indicates that the fund has an upside capture ratio of 109.2, indicating that it rises much more than the benchmark Nifty 500 TRI during rallies. Its downside capture ratio is 76.5, suggesting that the fund’s NAV falls a lot less than the benchmark during corrections. A score of 100 indicates that a fund performs in line with its benchmark.

Deft portfolio moves

The Mahindra Manulife Focused fund invests  in a crisp portfolio of around 30 stocks, in keeping with the mandate for the category.

The fund has always had financial services as the top sector in its holdings across timeframes. But, subsequent holdings are churned mildly. Earlier software companies (IT) were favoured more as the segment had corrected and valuations were reasonable. However, the fund has recently upped stakes in FMCG companies and oil, gas & consumable fuel segments. It has pared exposure to automobiles and auto components as well as healthcare sectors.

On the whole, Mahindra Manulife Focused fund largely follows a mix of value and growth styles of investing.

The fund generally holds over 80 per cent of its portfolio in large-cap stocks across market conditions. But it did make an exception in 2023 (exposure to large caps was only a little over 70 per cent), when it increased stakes in midcaps with a bit of small caps thrown in as well. This exposure helped the fund outperform  strongly over the past year, given the broader market rally. It has since restored the large-cap heavy structure in recent months.

Mahindra Manulife Focused fund usually picks the top 2-3 stocks in each sector unless midcaps dominate the segment.

Despite being a focused fund, the portfolio has limited exposure to individual stocks. Barring the top 2-3 picks, most account for less than 5 per cent of the overall holdings, thus avoiding major concentration risks.

Overall, the fund is suitable for those with a moderate to high-risk appetite and with a time horizon of 7-10 years. Exposure via the SIP route is ideal for investors.