Why investing in this focused fund can be fruitful

After six months of protracted market correction due to prolonged FPI selling and more recently early in April as US trade tariff flip flops had investors on tenterhooks, indices have started to inch up steadily. Although valuation comfort is still elusive in much of the mid and small-cap spaces, a significant leeway seems available in the large-cap segment.

Given the revival in the markets, taking exposure to focused funds that are large-cap oriented, and have managed to deliver better than broad-based benchmarks, would suit investors with a reasonable risk appetite.

Large-cap bias helps funds to moderate risk levels in the portfolio.

Such focused funds may suit investors with an above-average risk appetite looking to save for the long term, but with a mild exposure to lower market cap stocks to enhance returns.

Market regulator SEBI’s mandate requires focused funds to maintain a portfolio of not more than 30 stocks. Despite the restriction, it is still possible to build a less concentrated portfolio with healthy stock and sector selection.

In this regard, HDFC Focused fund (HDFC Focused Large Cap earlier, operational since 2004) has been among the best performers in its category, especially in the post-Covid period.  The scheme has delivered steady outperformance over its benchmark on a consistent basis. Investors can consider taking exposure to the fund for the long term of seven-plus years via the SIP route.

Healthy outperformance

As the focused funds category itself was introduced only in 2017-18, we take performance records from January 2018.

When we consider the point-to-point returns over the past one, three and five-year periods, HDFC Focused fund has outperformed its benchmark, Nifty 500 TRI, by 7-11 percentage points.

When three-year rolling returns over the period January 2018-April 2025 are considered, the fund has outperformed its benchmark 68 per cent of the time. HDFC Focused has delivered more than 15 per cent returns for as much as 77 per cent of the time and more than 18 per cent nearly 66 per cent of the time.

The mean three-year rolling returns over the aforementioned timeframe is 22 per cent for the fund, making it one of the best in the category. The return figure is 18.1 per cent for the Nifty 500 TRI.

When SIP returns over the past seven months are taken, the fund has managed an XIRR of 23.7 per cent. An SIP in the Nifty 500 TRI would have given an XIRR of 17.1 per cent over the same period.

Data from April 2022 to April 2025 indicate that the fund has an upside capture ratio of 102.2, which means it rises a bit more than the benchmark Nifty 500 TRI during rallies. Its downside capture ratio is only 48.7, 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.

All data points pertain to the direct plan of the fund.

Smart portfolio moves

HDFC Focused fund invests in 29-30 stocks, in keeping with the mandate for the category. However, barring the top 3-4 holdings, the weightages for other stocks are less than 5 per cent. This makes the portfolio crisp and yet well-diversified.

One key aspect about the fund’s derisking strategy is that it generally holds cash and debt positions of over 10 per cent. Currently, HDFC Focused holds over 16 per cent of its portfolio in cash, debt and REIT investments, thus insulating the portfolio reasonably during stiff corrections.

The fund portfolio is also dominated by large-cap stocks. Of course, this proportion has come down in recent years due to the opportunities in the broader markets. From over 80 per cent earlier, the fund holds nearly 66 per cent of its portfolio in large-caps. Mid and small-cap stocks have accounted for 15-25 per cent of the overall holdings.

The fund has always had banks in its top holdings. In the market correction of September 2024 to March 2025, this helped the fund outperform. It churns other sectors based on a combination of valuation and industry dynamics. It was quick to spot the opportunities in pharma and healthcare in 2021, and again in 2024, which led to the scheme increasing stakes in these segments. In recent months, it has upped exposure to automobiles as the correction in the segment presented attractive options.

It was also early to spot the emerging opportunities in the aerospace and defence segments back in 2022, but later pared stakes as the segment got too hot with excess valuations.

Overall, the fund takes a mix of value and growth calls to take informed bets in segments, while ensuring heavy cash calls to insulate the portfolio.

Published on May 2, 2025

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