Focused Funds: Benefits & Risks - A Comprehensive Guide

Focused funds are a type of mutual fund that holds a smaller number of stocks than a traditional mutual fund does. This type of fund may only hold 20 stocks, where a regular fund will hold hundreds. Here are a view of the pros and cons of focused funds.

Pros

With this type of fund, fund managers attempt to do a great deal of research and choose a limited number of stocks to work with. By working with a smaller number of stocks, the fund managers can stay on top of things and make changes as they are needed. Another advantage of this strategy is that it can sometimes provide superior returns. It is a lot easier to find 20 good stocks than it is to find hundreds of them.

Cons

One of the disadvantages of a focused fund is that it does not provide any diversification. This means that if the fund managers choose the wrong stocks to work with, it can be disastrous for the fund. One company going out of business in that basket of stocks could cause the entire fund to lose a great deal of money. This makes the focused fund one of the most volatile types of mutual funds available.