Ask Morningstar: Understanding Focused Funds

Oct 12, 2022
Senior Research Analyst Nehal Meshram answers a reader's query.

I have been investing in these mutual funds over the past 24 months: Mirae Asset Tax Saver Fund (Rs 6,000), Axis Focused 25 Fund (Rs 4,500), PGIM India Midcap Opportunity Fund (Rs 4,500), Quant Tax Plan (Rs 6,000), IDFC Nifty 50 Index Fund (Rs 4,500). I am worried about Axis Focused 25, as it is not doing well from last year. What changes must I make? My time horizon is 5 years.

The funds that you have named are all well managed strategies with different mandates. You will witness the true benefits of staying invested over the long term.

Mirae Asset Tax Saver Fund: We have a very high conviction on this fund. Portfolio manager Neelesh Surana has been the managing this strategy since its inception in December 2015 and has proved himself as an accomplished manager delivering above-average returns with his bottom-up stock-picking approach. He focused towards picking stocks with a Growth at Reasonable Price (GARP) framework. The fund invests predominantly into large-cap stocks with an allocation of 20-30% into mid and small caps.

PGIM India Midcap: At least 65% of the corpus is invested in companies ranked between 101-250 by market capitalisation. The fund also invests about 10-20% in small cap stocks which could add risk to the portfolio. The fund is managed by Aniruddha Naha. He looks for companies with stable earnings and strong earnings visibility. He also allocates some portion of the portfolio in companies with turn around stories which are temporarily going through bad phase but have significant potential for alpha generation.

Quant Tax Plan: The fund is run with a flexible investment approach in terms of sector and capitalization exposures. The fund has fair bit of changes in the portfolio driven by their investment framework of VLRT - Valuation, Liquidity, Risk appetite, and Time. There have been significant changes made in the sector allocation as well as market-cap allocations as per their model over the years. The performance of the fund has been good by having about 35-40% exposure to mid and small caps. While sector rotation could work over a longer term, it can be accompanied by greater volatility.

IDFC Nifty 50 Index: The fund replicates the Nifty 50 index by investing in securities of the Nifty 50 in the same proportion / weightage.

Axis Focused 25: You need to understand that there could be a bout of underperformance and it should not be a cause of worry. Your decision on redeeming an investment shouldn't be made primarily on short term performance. It is important that an investor must experience a full market cycle. It is likely that the fund is experiencing a temporary downfall because of the fund type, market volatility or the fund manager’s strategy which is not in sync with the current trends. We believe that one should not exit a fund abruptly as the same fund can bounce back more strongly than others with the change in market conditions. Thus, it is extremely important to have a long term investment approach – at least 5-7 years to witness the true benefits.

Also, it is important to keep your return expectations in check. Being invested in the best-performing fund all the time is not possible. Even the best funds could experience some ups and downs occasionally. If you try to chase returns, you probably end up losing. To get more clarity on this, please read our Mind the Gap study: The gap between investor return and investment return.

We believe that Axis Focused 25 has the necessary capabilities to bounce back strongly. The fund is managed by an experienced portfolio manager Jinesh Gopani since June 2016. His expertise as a stock-picker stands out. The fund follows a concentrated growth-oriented strategy with a focus on large-cap stocks. Since the fund maintains a concentrated portfolio it could be risky but it also offer superior returns if held for a long period. When choosing stocks, the portfolio manager follows a bottom-up investment strategy and a sound investment process. The fund has witnessed a significant growth in assets over the past year but that has not diluted the portfolio or the execution of the strategy. The AMC has internal limits in terms of capacity, and we think that this is a positive.

The fund has relatively underperformed its peers in 2021 and so far in 2022. However, the market has recently been highly volatile, and as mentioned, some strategies may perform poorly in certain market scenarios. You may continue with your investments if you are fine with the risk associated with this kind of strategy.

We recommend holding onto the funds you have invested in. It would be prudent to assess how well the investment process of Axis Focussed Fund is plied over a longer term.


Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.

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