Tata Focused Equity Fund Review: Is this any different?

Tata Focused Equity Fund is an open-ended equity scheme investing in a maximum of 30 stocks across market caps. We discuss if this is any different or something worth a deeper look

Published: November 28, 2019 at 9:57 am

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Tata Focused Equity Fund is the new “focused fund” from Tata AMC. Its NFO period closes 29th Nov 2019 and the fund will be available for purchase again from (or before) Dec 11th 2019. Let us take a look at the features of this fund to find out if this is any different or worth keeping an eye on.

Tata Focused Equity Fund will be managed by Rupesh Patel who also manages Tata Midcap Growth Fund, Tata Large Cap Fund, Tata India Tax Savings Fund, Tata Infrastructure Fund and Tata Ethical Fund & Tata Offshore India Sharia Scheme. Let us begin with a faq on focused funds.

FAQ on Focused Mutual Funds

Why do AMCs keep launching NFOs? Short answer: for profit. NFOs can generate a quick 1000 Crores (for big, established AMCs) in about a month.  Are there any rules that govern the type of NFOs? Yes. The SEBI fund categorization rules.

These rules state only one scheme per category  would be permitted, except:

  1. Index Funds/ ETFs replicating/ tracking different indices
  2. Fund of Funds having different underlying schemes
  3. Sectoral/thematic funds investing in different sectors/themes

This is the reason why we notice the big AMCs push sectoral or thematic funds these days. There is no limit on the number of such funds each AMC can promote. In the present, there can only be on focused fund per AMC.

What is a focused fund?  A focused fund is one that can only invest in 30 stocks. They much maintain 65% equity exposure to maintain tax status as an equity fund. There are no restrictions on where they can invest in terms of market cap and sectors.

Why 30 stocks? The origins of this could be from a paper by Lawrence Fisher and James H. Lorie where they point out a 30-odd stock portfolio could result in an optimal mix of risk and reward. This is quite debatable as discussed in this Investopedia article.

Will having only 30 stocks in the portfolio make it more risky or rewarding? It depends. If one picks the top 30 stocks from the Nifty 50, the risk and reward will be barely different (see the picture in the above link). If the fund picks say an equal amount of large, mid and small cap stocks then it will be more volatile than say the Nifty 500. Rewarding may or may not be!

What are the pros and cons of a focused fund? There are two aspects to this. In general, a focused fund can be more fund manager dependent than a diversified mutual fund. However, a 100% equity portfolio with 30 stocks will have 3.3% individual exposure only about 1% more than for 50 stock portfolio which is typical for diversified equity funds.

The second aspect concerns investors. For a focused to work in an investors portfolio, it should have a big enough presence. That it is should be the core holding. Add a large cap or another multicap to it, then the benefits will get diluted.

Tata Focused Equity Fund: Basic Features

Asset Allocation: Tata Focused Equity Fund can allocate its assets in the following way:  Equity and equity related instruments: 65% to 100% (30 stocks maximum with no foreign securities); Bonds: 0% to 35%; REITs & InvITs: 0% to 10%. There will be no cash calls based on market conditions. Buying and holding with the main approach.

Investment Strategy: According to the scheme presentation (again a case of the scheme document having no useful information and the presentation having plenty but none of it legally binding), the fund will combine value and growth investing.

The AMC defines “growth” as 15%+ CAGR over 3 years plus businesses that have a long runway. The fund hopes to remain in such companies as they scale up. They will use a bottom-up approach to pick stocks without reference to the benchmark (BSE 200)! In short, there is nothing different or unique about the fund’s proposed investment strategy.

Unfortunately, the scheme presentation places too much emphasis on “picking the right stock” with some cherry-picked illustrations to back this up. The whole point of investing in a mutual fund (with 30 stocks or 60) is to reduce selection risk!

Tata Focused Equity Fund: Should You Invest

If your portfolio (not you) actually needs a focused multicap fund, then you certainly can take a chance with this fund. It would be the same amount of chance with any other focused fund such as the ones we have reviewed before: SBI Focused Equity FundAxis Focused 25 FundFranklin India Focused Equity FundMirae Asset Focused Fund. The reason being, the focused category is only about a year old (May 2018).

Staying away from such focused fund and sticking to aggressive hybrid or balanced advantage or multi-asset funds is a better choice in the author’s opinion. See for example 11 aggressive hybrid (balanced) mutual funds that have beat Nifty 100!!

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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