The Focused Fund Puzzle

When Conviction Meets Chaos
In September 2025, an investor we shall call Supriya — a 34-year-old product manager in Gurugram— split a lump sum Bonus between two funds from the same "focused equity" category. One went into Motilal Oswal Focused Fund, a high-conviction, high-turnover portfolio built around thirty ideas. The other went into Franklin India Focused Equity Fund, one of the category’s oldest and largest offerings. Both funds sat under the identical SEBI label. Both promised the same thing: fewer stocks, deeper research, sharper returns.[EasyDNNnews:PaidContentStart]

Eleven months later, in August 2026, Priya’s statements told two entirely different stories. Motilal Oswal’s fund had returned 29 per cent over the trailing year — the best performance in the entire category. Franklin India’s fund had lost investors money, down 6.2 per cent over the same period, the worst showing among all 28 funds in the space. Same regulatory category, same 30-stock ceiling, same "very high risk" label on the riskometer — and a 35-percentage-point gap in outcomes. That gap is not a footnote. It is the entire story of focused funds in India.

The past year has been a useful stress test for the format. Indian equities delivered one of the more unsettled stretches in recent memory: a savage technology sell-off in February 2026 that some analysts likened to a mini AI-bubble unwind, followed by a broad-based March rout in which Large-Cap funds shed close to 12 per cent, Mid-Caps nearly 11 per cent and Small-Caps almost 10 per cent in a single month.

By July, the average flexi-cap fund had round-tripped back to where it started the year, and large-caps were still nursing losses. Against that backdrop, the focused category — collectively holding roughly ₹1.86 lakh crore across 28 direct-plan schemes as of August 2026 — has produced a median one-year return of just under 5 per cent, but with a dispersion between best and worst performer wide enough to swallow an entire market cycle.

This is the paradox at the heart of the focused-fund proposition. The category exists on a simple, seductive premise: give a skilled manager fewer names to worry about, let conviction replace diversification, and superior stock-picking should translate into superior returns. In theory, concentration is a lever for alpha. In practice, in a market as volatility-prone as India’s, that same lever amplifies manager error just as efficiently as it amplifies manager skill. Priya’s two funds are proof that the category label tells you almost nothing about which side of that lever you will end up on.

So is the focused-fund format actually suited to India’s swings, or is it a structure that works brilliantly for a handful of managers and punishes everyone else who merely bought the story? Answering that requires digging into the numbers — returns, risk, cost, manager tenure and the messy question of skill versus luck — rather than the marketing pitch.

From Regulatory Afterthought to Investor Favourite
Focused funds did not always have a name of their own. Before October 2017, when the Securities and Exchange Board of India rolled out its landmark Mutual Fund re-categorisation exercise, concentrated equity portfolios existed as a stylistic choice within diversified schemes rather than a distinct product category. SEBI’s 2017 framework changed that by carving out "Focused Fund" as one of eleven equity sub-categories, defined by a single, elegant constraint: a maximum of 30 stocks in the portfolio. Everything else — which market-cap segments to hunt in, how much to churn the book, which sectors to overweight — was left to the fund manager’s discretion, subject to a minimum equity allocation that regulators have since tightened from an original 65 per cent to 80 per cent under the current categorisation norms.

That single design choice — cap the number of names, but don’t cap where those names come from — is what makes focused funds structurally different from their closest regulatory cousins, summarised below.

For years after 2017, the category remained a niche corner of the industry, dwarfed by large-cap and multi-cap offerings. That began changing meaningfully from around 2020, as a wave of new launches — Mirae Asset, Kotak, HSBC, ITI, and, most recently, Old Bridge Mutual Fund’s high-profile entry helmed by veteran value investor Kenneth Andrade — expanded investor choice and, more importantly, marketing visibility. Distributors found focused funds an easy story to sell: "your fund manager’s 30 best ideas" is a more compelling pitch than "a diversified basket you could largely replicate with an Index Fund." The result has been a decade of steady asset accumulation, and — as the data below shows — a category that has kept growing even through a year in which its own median return barely beat inflation.

The Numbers: A Category of Extremes Returns and The Dispersion Problem
Pull the trailing performance data on all 28 direct-plan focused funds as of early September 2026, and the headline is not the category average — it is the spread around it. The category snapshot below sets the scene.

The median one-year return sits at 4.85 per cent, roughly in line with what large-cap and flexi-cap categories have managed through a choppy 2026, but the range around that median is extraordinary for what is nominally a single, homogenous category, as the chart below makes plain.

Chart 1: One-year trailing returns across all 28 direct-plan focused funds. The near-35-point spread between Motilal Oswal (+29.0%) and Franklin India (–6.2%) illustrates how differently managers have used the same 30-stock mandate. Source: Value Research, consolidated 08-Sep-2026.

At one end: Motilal Oswal Focused Fund at 29.0 per cent, Old Bridge Focused Fund (barely two-and-a-half years old) at 19.4 per cent. At the other: Franklin India Focused Equity Fund at minus 6.2 per cent, Mirae Asset Focused Fund at minus 1.0 per cent, It is, however, entirely consistent with what concentration theory would predict: fewer stocks means each position matters more, so a manager who gets three or four calls badly wrong has nowhere to hide.

Stretch the horizon out and the picture moderates, as it should — skill and luck separate more cleanly over longer periods. On five-year SIP returns (a more realistic proxy for how most Indian retail investors actually build positions), the category’s median comes in at 12.2 per cent annualised, with Invesco India Focused Fund leading at 18.2 per cent, followed by ICICI Prudential Focused Fund at 15.7 per cent, HDFC Focused Fund at 15.5 per cent, Motilal Oswal at 15.1 per cent and SBI Focused at 15.0 per cent. Several of the one-year laggards — Franklin India among them — also languish near the bottom on the five-year SIP table, at under 8 per cent, suggesting their underperformance is not simply a rough patch but a more structural pattern of trailing the pack across periods.

Table: Category leaders across four performance and risk-adjusted lenses. Note how Invesco India and SBI Focused appear in multiple columns — a signal of genuine, persistent skill rather than a single lucky year. Source: Value Research direct-plan data, consolidated 08-Sep-2026.

Risk-Adjusted Returns: Where The Real Separation Happens
Raw returns flatter momentum; risk-adjusted metrics are less forgiving, and they matter more in a category explicitly built to take on extra concentration risk. The Sharpe ratio — which measures return earned per unit of volatility, with higher being better — averages 0.59 across the category’s data-eligible funds, a middling figure that masks a genuine quality gradient.

Not Every Winner Is Built the Same
A strong one-year return can often hide the risks taken to achieve it. In focused funds, where a few stock calls can significantly impact performance, the quality of returns matters as much as the returns themselves. Investors should look beyond short-term rankings and assess consistency, risk-adjusted performance and the fund manager’s ability to deliver across different market cycles.

Chart 2: The ten funds delivering the most return per unit of risk taken. Invesco India’s 0.97 Sharpe ratio is nearly 65 per cent above the category average of 0.59. Source: Value Research, consolidated 08-Sep-2026.

Invesco India Focused Fund tops the table with a Sharpe of 0.97, comfortably ahead of HDFC Focused Fund (0.88), ITI Focused Fund (0.85), ICICI Prudential Focused Fund (0.84) and SBI Focused Fund (0.80).

Alpha, the excess returns a fund generates over what its risk profile alone would predict, tells a similar story. Invesco India Focused Fund again leads with an alpha of 9.95, trailed by ITI Focused (6.78), ICICI Prudential Focused (6.05), HDFC Focused (5.74) and SBI Focused (5.40). Several funds, including Franklin India Focused (–1.20), Mirae Asset Focused (–2.46) and Baroda BNP Paribas Focused (–1.12), show negative alpha — meaning they have, on a risk-adjusted basis, actually destroyed value relative to what a passive exposure with similar risk characteristics would have delivered. That is a damning number for a category whose entire raison d’être is manager-driven outperformance.

The chart below plots every fund with a full five-year track record on both axes at once — volatility (standard deviation) against five-year SIP return, with bubble size representing assets under management. The upper-left quadrant is where investors want their fund to sit: high return, low volatility.

The Risk Behind the Reward
Returns alone do not tell the complete story of a focused fund. With portfolios concentrated in fewer stocks, every investment decision carries a greater impact on overall performance.

Funds that generate returns while managing volatility effectively have a stronger foundation for long-term wealth creation. Metrics such as Sharpe ratio and alpha help investors distinguish genuine fund management skill from returns driven by market momentum or favourable conditions.

Chart 3: Risk vs. reward across the category. HDFC and SBI (large bubbles, upper-left) combine scale, calm and strong five-year SIP returns. Franklin India and Mirae Asset (lower-left) have taken below-average risk but delivered below-average reward — the least attractive combination on the chart. Source: Value Research, consolidated 08-Sep-2026.

Downside protection and drawdowns are the other side of the risk coin, and here the case for focused funds is more nuanced than either promoters or critics tend to admit. Because these funds are not mandated to hold any minimum allocation to mid- or small-caps, several managers — HDFC Focused and ICICI Prudential Focused among them — have historically used that flexibility to raise large-cap weightings and cash levels when valuations looked stretched, cushioning portfolios during the sharper legs of the February–March 2026 correction. Other funds, particularly newer, higher-turnover entrants such as Quant Focused (portfolio turnover of 463 per cent — meaning the fund effectively churns its entire book more than four times a year) and Motilal Oswal Focused (turnover of 65 per cent, standard deviation of 19.6, the highest in the category), leaned into momentum and paid for it in volatility, even when the underlying returns look attractive in hindsight. The lesson: "focused" is not a single risk profile. It is a spectrum from disciplined, valuation-aware concentration to high-turnover, high-beta stock-picking that happens to share a regulatory label.

Portfolio Construction: How Managers Actually Use The 30-Stock Leash
The 30-stock ceiling is a constraint on breadth, not on style, and India’s focused-fund managers have used that latitude in markedly different ways. Some run what are effectively large-cap-tilted "best ideas" portfolios — SBI Focused Fund, the category’s largest at ₹50,041 crore, is managed by Rama Iyer Srinivasan, who has run the fund continuously for close to fourteen years, longer than any other manager in the category, and has built a book that leans heavily on established, liquid large-cap names with occasional mid-cap additions. Others run genuinely multi-cap focused books that swing hard into mid- and small-caps when conviction is high; Motilal Oswal Focused and Old Bridge Focused, the latter helmed by the well-known value investor Kenneth Andrade, both sit in the "Blend" style box with meaningfully higher turnover and volatility than the SBI or HDFC funds.

Sector concentration compounds the stock concentration. Because a 30-stock cap naturally limits how many sectors a fund can meaningfully represent, focused funds tend to carry larger active sector bets than diversified peers — a heavy private-Bank weighting here, an outsized capital-goods or IT bet there. That is precisely the mechanism through which concentration risk shows up in performance: a focused fund that got financials right and technology wrong in 2026’s sell-off would have looked very different from one that made the opposite calls, even though both operated within identical regulatory bounds.

The Cost Of Conviction
Expense ratios in the focused category average 0.72 per cent for direct plans — broadly comparable to flexi-cap and large-cap peers, and meaningfully cheaper than the small-cap and thematic categories, but still a real drag when compounded over a decade.

Table: The cheapest and the largest. Note that Invesco India Focused Fund — the category’s Sharpe and alpha leader — also sits among the five cheapest funds; proof that low cost and high skill are not mutually exclusive. Source: Value Research, consolidated 08-Sep-2026.

It is worth noting that Invesco India Focused Fund manages the rare trick of combining a low expense ratio with the category’s best Sharpe ratio and alpha — evidence that low cost and high skill are not mutually exclusive, even if they are not guaranteed to travel together. Over a ten-year SIP, the difference between a 0.48 per cent and a 1.10 per cent expense ratio can shave off a percentage point or more of annualised return — a gap that, compounded, is larger than many investors realise until they run the maths.

Skill, Persistence and The Honest Answer on "Manager Alpha"
The uncomfortable truth the data surfaces is that outperformance in this category is concentrated in a small number of funds, and it persists reasonably well across time horizons for some of them — but not for others. Invesco India Focused Fund, HDFC Focused Fund, ICICI Prudential Focused Fund and SBI Focused Fund appear near the top of the table across one-year, five-year and risk-adjusted metrics simultaneously, a pattern that is difficult to explain purely by luck and that most analysts would read as genuine, persistent stock-selection skill compounded by long manager tenures — SBI’s Srinivasan (13.7 years), Invesco’s Taher Badshah (6 years) and HDFC’s team all fall on the more experienced end of the spectrum.

Tax Efficiency and Investor Fit
On taxation, focused funds carry no special advantage or disadvantage relative to any other diversified equity category: short-term capital gains (holdings under twelve months) are taxed at 20 per cent, and long-term gains above the ₹1.25 lakh annual exemption are taxed at 12.5 per cent, identical to flexi-cap, multi-cap and large-cap funds. The tax conversation, in other words, should not drive the choice between focused and diversified equity funds — the risk-return trade-off should.

What Happens Next: Three Paths for the Category
The category’s near-term fortunes will hinge on three broad macro forces, each of which points toward a different scenario for focused-fund investors over the next two to three years. Money continues to arrive regardless of the debate: the category has logged a net inflow every single month over the past eleven, even through the February–March 2026 correction.

Chart 4: Category AUM has climbed from ₹1.63 lakh crore to ₹1.85 lakh crore since September 2025, with positive net flows in every single month — including the volatile Feb–Mar 2026 stretch. Source: AMFI, consolidated 08-Sep-2026.

In a continued range-bound or choppy market — the most likely near-term scenario given persistent uncertainty around global rate paths, AI-sector valuations, and India’s own election and fiscal calendar — the dispersion story is likely to intensify rather than fade. Range-bound markets punish momentum-chasing, high-turnover managers and reward patient, valuation-disciplined stock-pickers, which should widen the gap between the category’s top and bottom quartiles even further. Investors should expect the current leaders — funds combining reasonable turnover, experienced management and demonstrated risk-adjusted outperformance — to keep separating from the pack, while newer, unproven entrants remain a coin toss.

In a sustained bull run, likely triggered by a durable global rate-cutting cycle, resilient domestic earnings growth, or a re-rating of mid- and small-caps, high-beta focused funds with aggressive mid-cap tilts — the Motilal Oswal and Quant Focused style of portfolio — would be expected to outperform meaningfully, much as they did in the year to September 2026. The risk for investors is recency bias: chasing last year’s 29 per cent winner into a fresh bull phase, without appreciating that the same high standard deviation that generated those returns can just as easily generate the next leg of losses when the cycle turns.

In a sharper bear market, of the kind India experienced briefly in February–March 2026, focused funds as a category are structurally more vulnerable than diversified flexi-cap or large-cap peers, precisely because a 30-stock portfolio has less room to average out sector-specific shocks. Funds with lower standard deviation, higher large-cap tilts and managers who have historically raised cash or defensive positioning ahead of drawdowns — the HDFC and SBI style of focused investing — are the more sensible hiding place within the category; high-turnover, high-beta funds are the ones to trim first.

Chart 5: The focused category’s one-year average return (5.91%) sat almost in line with flexi-cap funds and well ahead of large- and small-caps in the most recent comparable industry snapshot — evidence that concentration, on average, has not meaningfully hurt category returns even if it has widened the range around them. Source: Business Standard / PL Wealth, illustrative industry snapshot, Jan 2026.

The Bottom Line for Investors
Focused funds are not a verdict on Indian market volatility so much as a mirror held up to it: they take whatever the market gives — opportunity or chaos — and magnify it through the lens of a concentrated portfolio. The category-level data is unambiguous on one point: this is not a format where you can safely buy "the category" and expect category-average outcomes, because the dispersion between funds sharing an identical regulatory label is simply too wide, and the drivers of that dispersion — manager tenure, turnover discipline, valuation sensitivity — are identifiable in advance, not just visible in hindsight.

Appendix: Full Category Data — All 28 Focused Equity Funds Sorted by assets under management (AUM), largest first. Direct-plan data as consolidated on 08 September 2026. “—” denotes data not available (typically for funds without a full track record over that period).

For investors weighing an allocation, three practical rules emerge from the numbers. First, treat focused funds as a satellite holding, not a core one — cap the allocation at 10–20 per cent of total equity exposure and keep a diversified flexi-cap, large-cap or index fund as the foundation. Second, screen on process, not just on trailing one-year returns: prioritise funds with below-category expense ratios, abovecategory five-year Sharpe ratios and alpha, and manager tenures of at least three to five years, since the data shows these traits cluster together and persist. Third, watch turnover as a red flag rather than a curiosity — a fund churning its portfolio several times a year is making a fundamentally different, higher-risk bet than one holding its convictions for the long haul, regardless of what the marketing brochure says. Red flags worth walking away from include recent, unexplained manager transitions, persistently negative alpha across multiple periods, and standard deviation meaningfully above the category average without a commensurate return premium.

Used selectively, and sized sensibly, focused funds can be a legitimate way to access genuine active-management skill in a market that has, in recent years, made that skill harder to find and easier to mistake for luck. Used carelessly — chased on the strength of last year’s chart-topper — they are simply a faster way to experience India’s market volatility, undiluted.

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