Even as investors pour record sums into mid- and small-cap funds amid a broader mutual fund boom, one equity category continues to remain on the fringes — focused funds.
Designed to give fund managers the freedom to make high-conviction bets across market capitalisations, focused funds can hold a maximum of 30 stocks. But the concentration that sets them apart has also become one of their biggest hurdles in attracting investors.
Assets under management (AUM) in the category have grown 69% over the three years ended August 2026 to Rs 1.88 lakh crore, according to data from the Association of Mutual Funds in India (Amfi). That is slower than every other equity fund category except equity-linked savings schemes (ELSS), which have lost some of their appeal as tax-saving instruments following the introduction of the new tax regime.
Experts attribute the relatively muted growth of focused funds to a combination of concentration risk, limited shelf space and the availability of more diversified alternatives such as flexi-cap and multi-cap funds.
Aditya Agarwal, co-founder of Wealthy.in, said mutual fund categorisation rules allow an asset management company (AMC) to offer only one focused fund, limiting the category’s shelf space compared with sectoral and thematic schemes.
More importantly, focused funds compete with flexi-cap schemes, which also allow fund managers to invest across market capitalisations but without restricting them to a narrow portfolio. This makes it harder for advisors to justify the additional concentration risk of a focused fund unless there is a compelling high-conviction investment case.
The category’s natural investor base is consequently narrower, Agarwal said. Focused funds are better suited to investors who are already diversified elsewhere and are looking for a concentrated, high-conviction satellite allocation rather than a core portfolio holding.
Gajendra Kothari, MD and CEO of Etica Wealth, also attributed the category’s limited popularity to the availability and performance of alternatives such as flexi-cap and multi-cap funds.
Concentrated portfolios can make performance more volatile, particularly during market downturns, making focused funds a tougher sell for distributors and advisors catering to retail investors, he said.
For fund houses, meanwhile, the category presents an unusual challenge: as a focused fund grows in size, the strategy can become harder to execute.
Kothari said focused funds have greater flexibility to take meaningful positions across market capitalisations while their AUM remains relatively small. As a scheme grows, however, building sizeable positions in mid- and small-cap stocks becomes more difficult because of liquidity constraints.
The 30-stock ceiling compounds the problem. A large fund seeking meaningful exposure to relatively illiquid stocks risks taking positions that may be difficult to enter or exit without affecting prices.
As a result, larger focused funds can gradually become tilted towards large-cap stocks, diluting one of the category’s key attractions — the ability to make concentrated bets across the market-cap spectrum.
Despite these constraints, experts do not expect focused funds to disappear. Instead, they see the category remaining a niche proposition, with growth likely to be gradual as investors become more sophisticated.
“As investor sophistication rises and advisors get more comfortable positioning concentration as a feature rather than a risk, focused funds should keep gaining share gradually,” Agarwal said. However, he expects the category to grow steadily rather than break into the mainstream in the way flexi-cap or sectoral funds have.
Kothari similarly expects focused funds to remain a niche category. Smaller schemes, however, could merit consideration for sophisticated investors with a high risk appetite who are looking to add a concentrated strategy to an already diversified portfolio.