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Why are Focused and Multicap funds clubbed together on VRO?

Focused fund is nothing but a more concentrated Multicap fund and they should be compared together, as their role in an investor's portfolio is the same, informs Dhirendra Kumar

On your website, Focused and Multicap funds are clubbed together, even though they are different categories in the sense that Focused funds have restrictions on the number of stocks. Other websites have them listed separately. Please clarify and also suggest which one is better.
- Manas Gupta

Focused funds are also Multicap funds and Multicap funds are Multicap funds. Therefore, they are clubbed together. This is because when an investor is choosing a Multicap fund, whether it happens to be a Focused or a Multicap fund, it doesn't matter. You are investing in a Multicap fund, which by its very design is going to invest in fewer stocks. I would say that Focused funds are relatively more volatile. Think of it like a Multicap fund on a steroid or as a more concentrated Multicap fund. That is why we have kept it together, because most investors should compare them together. For me, it is the same category.

All of the mutual fund categories are created by SEBI's committee. I am part of that committee as well and when this discussion was going on, there was almost a kind of bargaining going on. Mutual fund companies' representatives wanted more categories and SEBI's objective was to have a simpler and less number of categories. So, in the bargain, Focused funds were allowed.

But from investors' point of view, I would say that although we have around 16 categories in debt funds and equity funds of various kinds, I think most investors can do with five-six kinds of funds. You need a tax saving fund. You need an Aggressive Hybrid fund. You need a Multicap fund. Maybe you can supplement it with a Small- or Mid-cap fund. And that's about it. So, most common investors can do without them. Likewise, in fixed-income funds, although there are around 16-17 categories, you can do without most of them.

When I'm saying this, I'm talking about the close to 32 categories, which are open-ended. These do not include different kinds of index funds, different kinds of ETFs. You can have about 50 kinds of funds which are just too many. You need to really restrict and get focused in terms of what fulfils your need. You need an equity fund and you need a debt fund. And you need some Liquid funds to park your short-term corpus. And for this, five-six kinds of funds can actually fulfil your needs.

Choose a Focused fund if you can withstand the volatility or choose a Multicap fund with a long track record. And it should provide you with relatively greater stability as compared to the former. Focused fund can potentially deliver more returns but it comes with a downside as well. So, that's the only difference.