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Focused Funds Challenge Diversification Norms

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  Published in Stocks and Investing on Thursday, January 22nd 2026 at 4:59 GMT by moneycontrol.com
      Locale: INDIA

Thursday, January 22nd, 2026 - The investment landscape has undergone a significant shift in recent years, challenging the long-held principle of diversification within mutual funds. While spreading investments across a broad range of stocks was once considered the gold standard for risk mitigation, a growing number of fund managers are embracing a different approach: focused funds. These funds, concentrating investments in a select few companies, are gaining traction and prompting a broader re-evaluation of traditional investment strategies.

What are Focused Funds?

Unlike traditional diversified mutual funds, which often hold dozens, if not hundreds, of stocks, focused funds typically limit their holdings to a significantly smaller number--usually between 20 and 30. This concentrated approach allows fund managers to dedicate more resources and expertise to a smaller, more thoroughly researched portfolio. This isn't simply about picking stocks; it's about identifying companies poised for significant growth and deeply understanding their business models, competitive advantages, and long-term potential.

Driving the Shift: Why Fewer Stocks Are Appealing

Several key factors are fueling the rise of focused funds. Firstly, the increasing market concentration in India is a major driver. A disproportionate amount of market capitalization is held by a relatively small number of large-cap companies. This effectively means that even highly diversified funds end up with a substantial weighting towards these dominant players. Consequently, the benefits of traditional diversification are being diminished.

Secondly, the pursuit of true quality has become more challenging in a crowded market. Finding a large number of companies that consistently meet stringent investment criteria - robust financials, sustainable competitive advantages, strong management teams - is increasingly difficult. Fund managers are opting to concentrate their efforts on a smaller pool of businesses they are confident will deliver superior returns.

Finally, heightened market volatility and valuations have further spurred the move towards focused strategies. With increased uncertainty, fund managers prioritize resilience and sustainability. Focused funds enable them to select companies with strong fundamentals and the ability to withstand economic headwinds. The emphasis has shifted from chasing rapid growth to identifying businesses with lasting strength and competitive positioning.

Potential Benefits and Risks

The potential upside of focused funds is compelling. By concentrating their best investment ideas, fund managers can more easily generate alpha - outperforming the broader market. This concentrated approach also facilitates more active and informed decision-making. Fund managers have greater opportunity to deeply understand the companies they invest in, allowing for quicker adjustments to strategies and a more agile response to market changes.

However, the concentrated nature of these funds also introduces significant risks. The performance of a focused fund is intrinsically linked to the success of its few holdings. If one or more of those key companies underperform, the fund's overall return can be significantly impacted. This makes focused funds inherently more volatile than their diversified counterparts, demanding a higher risk tolerance from investors.

Who are Focused Funds Suitable For?

Focused funds are not a one-size-fits-all investment vehicle. They are generally more appropriate for investors with a long-term investment horizon, the willingness to tolerate higher volatility, and a clear understanding of the increased risk involved. For risk-averse investors or those with short-term goals, traditional diversified funds remain a more suitable option. The relatively nascent nature of focused funds necessitates caution. While early performance data has been promising, longer-term trends and performance evaluations are still emerging. As always, past performance is not indicative of future results, and thorough due diligence remains paramount.

Looking Ahead

The emergence of focused funds signals a potential paradigm shift in investment strategies, demonstrating a willingness to challenge long-held beliefs about diversification. While offering the allure of higher returns, these funds demand careful consideration, risk assessment, and a keen awareness of the inherent volatility. As the Indian market continues to evolve, focused funds are likely to remain a compelling, albeit risky, option for a segment of the investor population.