Diversified Equity Funds

Diversified equity funds invest in companies of all sizes and sectors, spreading investments across the stock market to maximize gains. They are available through ULIPs, mutual funds, and other investment firms.
Diversified Equity Funds
3 min
19-June-2024

A diversified equity fund invests in companies across various sizes and sectors, aiming to maximize investor gains through broad market exposure. Offered by mutual funds, ULIPs, and other investment firms, these funds typically include equities from at least eight to ten different industries. They select around 40-60 stocks that align with their strategy, reducing risk by spreading investments. Types of diversified equity funds include large-cap, mid-cap, small-cap, multi-cap, and ELSS. This diversification makes them less risky and more suitable for the average investor. Learn more about the benefits and selection criteria for diversified equity funds in this blog.

What are diversified funds?

Compared to other mutual fund categories like mid-cap and small-cap funds, diversified mutual funds typically carry lower risk. This is facilitated by the fund manager's ability to switch between large-cap, mid-cap, and small-cap stocks based on prevailing market conditions, ensuring that investors can seize favourable market opportunities.

By investing in companies across different market capitalisations, diversified funds amplify returns and foster growth for investors. However, it's important to note that diversified funds are not immune to market volatility. While they may be impacted by adverse market conditions, the effect is generally less pronounced compared to non-diversified funds.

Diversified funds offer investors broad exposure to the market, with multi-cap funds serving as a prime example of diversification. These funds invest across various market capitalisations, saving investors time and simplifying the decision-making process. The balanced risk profile of diversified funds ensures resilience in different market scenarios, with small-cap funds performing well in bullish phases and large-caps providing support during market downturns. Investors with a reasonable understanding of equity markets and a moderate risk tolerance may find diversified mutual funds to be a suitable investment option.

What is diversification in equity mutual funds?

Diversification in equity mutual funds involves spreading investments across various sectors and market capitalisations, a strategy aimed at reducing portfolio risk. This approach extends to including multiple mutual funds within a portfolio, which helps mitigate the negative impact of underperforming securities or funds. The overarching goal of diversification is to safeguard portfolio returns from extreme market conditions.

Numerous fund houses provide diversified mutual funds across different fund categories. Investing in a single fund allows investors to access securities diversified across market capitalisations and industries. While diversified funds are not entirely immune to market volatility, they are typically less affected compared to funds focused solely on specific sectors or market capitalisations, such as pure large-cap, mid-cap, or small-cap funds.

To choose diversified mutual funds, consider your investment goals and risk tolerance, research fund options, and evaluate performance and fees. Additionally, decide whether to invest through Systematic Investment Plans (SIPs) for regular, disciplined investing or lumpsum investments for one-time contributions, based on your preferences and financial circumstances. Consulting with a financial advisor can further enhance your decision-making process.

What is a diversified equity fund?

A diversified equity fund invests across companies of various sizes and sectors, aiming to maximize investor gains. These funds are available through ULIPs, mutual funds, and other investment firms.

Types of companies in diversified equity funds:

  • Large Caps: Large companies with substantial market capitalisation.
  • Mid Caps: Mid-sized companies with medium market capitalisation.
  • Small Caps: Smaller companies with lower market capitalsation.

Types of diversified mutual funds

1. Multi cap mutual funds

  • Multi cap funds are a diversified mutual fund category where the fund manager has the flexibility to invest across any sector or market capitalisation.
  • The asset allocation within a multi cap fund depends on the discretion of the fund manager, who adjusts it based on prevailing market conditions.
  • These funds invest across large-cap, mid-cap, and small-cap stocks, offering diversification across different market segments.
  • Multi cap funds typically carry slightly higher risk compared to pure large-cap funds due to their broader investment mandate.

2. Value funds

  • Value funds belong to the diversified equity fund category and follow a value investing strategy.
  • These funds primarily invest in stocks considered undervalued, based on fundamental valuations.
  • Value funds diversify investments across sectors and market capitalisations.
  • Fund managers identify stocks trading below their intrinsic value and invest in them, aiming for potential capital appreciation.
  • While value funds offer downside protection, there is a risk of consistent underperformance even during bull markets.

3. Large and mid cap mutual funds

  • Large and mid-cap funds invest across both large-cap and mid-cap stocks, making them a type of diversified equity fund.
  • These funds have specific minimum investment requirements, mandating a minimum allocation of assets in both large-cap and mid-cap companies.
  • By diversifying investments across large and mid-cap stocks, these funds offer balanced exposure to different market segments.
  • Compared to pure large-cap funds, large and mid-cap funds carry slightly higher risk due to their diversified nature.

4. Hybrid funds or balanced funds

  • Hybrid funds, also known as balanced funds, invest across multiple asset classes, including equity and debt.
  • Examples of hybrid funds include arbitrage funds, balanced hybrid funds, aggressive hybrid funds, conservative hybrid funds, multi-asset funds, and equity savings funds.
  • Formerly known as balanced funds, hybrid funds offer diversification primarily across asset classes rather than specific sectors or market capitalisations.

Benefits of investing in diversified funds

1. Acts as a cushion during market volatility

  • Diversified funds offer investors access to a diverse array of industries and companies, encompassing different market sizes within a single investment vehicle.
  • This broad exposure enables investors who may lack the resources or expertise to individually invest across all sectors to participate in various industries through diversified funds.

2. Helps in achieving long-term financial goals

  • In times of market turbulence, diversified funds serve as a buffer for portfolio returns.
  • By spreading investments across sectors and market capitalisations, these funds help maintain portfolio returns and mitigate downside risk.

3. Reduces the time spent on monitoring a portfolio

  • Diversified equity mutual funds are instrumental in attaining long-term financial objectives such as retirement planning, funding a child's education, or preparing for marriage.
  • Investors who commit to diversified funds for the long term benefit from the compounding effect of returns, facilitating the fulfilment of their financial needs.
  • Investing in diversified equity funds can be done through SIP (Systematic Investment Plan) or lump sum investments, with tools like Bajaj Finserv's SIP Calculator aiding in estimating potential SIP returns.

4. Helps investors get acquainted with different strategies

  • A well-diversified portfolio requires less frequent monitoring amidst changing market conditions.
  • Fund managers oversee the portfolio of diversified funds, alleviating the need for investors to regularly review or rebalance their mutual fund holdings.

5. Helps investors get acquainted with different strategies

  • Diversified equity mutual funds offer exposure to various investment strategies, including different market capitalisations like multi-cap funds or sector diversification.
  • Investors can choose from strategies such as value investing or growth-oriented approaches, allowing them to diversify their investment styles within the market.

6. Access to the global market

  • Diversified funds provide investors with opportunities to access international equity markets.
  • Some diversified equity mutual funds invest in global equities, offering diversification across global companies.
  • Investing globally is essential for portfolio protection during domestic economic downturns or crises, ensuring diversification and safeguarding portfolio returns.

Things to keep in mind before investing in diversified equity funds

Investing in diversified funds requires careful consideration of various factors to ensure optimal outcomes. Here's a detailed breakdown of what investors should keep in mind:

Investment horizon

Diversified mutual funds are ideal for long-term investment objectives. While short-term fluctuations are common due to their volatility, sticking to a longer investment horizon typically yields substantial returns. It's recommended to maintain an investment period of at least five years to fully benefit from these funds.

Investment objective

Diversified funds are designed to align with investors' long-term financial goals, such as education planning, retirement, or marriage expenses. Their robust asset allocation strategies aim to generate favourable portfolio returns over time. Hence, investors should link their investment in these funds with specific financial objectives.

Expense ratio

Like other mutual fund categories, diversified funds incur fees known as the expense ratio for managing investors' funds. Due to their dynamic market approach, these funds often have higher turnover ratios and transaction costs. However, despite these costs, diversified funds frequently outperform many other funds, including large-cap and small-cap funds.

Fund objective

Diversified funds prioritise diversification as their core investment strategy. They aim to build wealth by investing across various sectors and market capitalisations. Fund managers conduct extensive research to identify promising stocks based on factors like earnings per share (EPS) and price-to-earnings (PE) ratio.

Return

Past performance doesn't guarantee future returns, but analysing historical performance helps gauge a fund's resilience to different market conditions. Funds demonstrating consistent performance over the long term amid market volatility stand a better chance of delivering significant returns in the future.

Risks

Diversified mutual funds, like all market-linked instruments, are subject to market risks. However, fund managers play a crucial role in managing asset allocation to capitalise on market dynamics and mitigate risks. Compared to pure mid-cap or small-cap funds, diversified funds generally carry lower risk levels.

In addition to the above factors, investors may also consider metrics like Sharpe ratio, standard deviation, alpha, beta, and Treynor's ratio. However, calculating these metrics may require time and expertise beyond some investors' capabilities, prompting them to seek assistance from financial advisors. Delving into mutual fund basics and asset classes can further enhance investors' understanding of these investment vehicles.

Conclusion

In conclusion, before venturing into diversified funds, investors must assess several crucial factors to optimise their investment strategies. Understanding the significance of investment horizon, aligning objectives with fund strategies, evaluating expense ratios, and acknowledging past performance while assessing risks is paramount for informed decision-making.

Moreover, leveraging platforms like Bajaj Finserv Platform can greatly aid investors in accessing a diverse array of mutual funds schemes tailored to their preferences and financial goals. With over 1000 mutual funds listed on the Bajaj Finserv Platform, investors gain unparalleled access to various investment opportunities, facilitated by robust research and expert guidance. Embracing such platforms not only streamlines the investment process but also empowers investors to navigate the dynamic landscape of financial markets with confidence and prudence.

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Frequently asked questions

Which is best diversified mutual fund?

Identifying the "best" diversified mutual fund is subjective and varies based on individual investor preferences, financial goals, and risk tolerance. Investors should research various funds, considering factors such as historical performance, expense ratios, fund objectives, and fund manager expertise, to determine the most suitable option for their investment needs. Consulting with a financial advisor can also provide valuable insights and guidance in selecting the right diversified mutual fund.

What is the 75-5-10 rule for diversified mutual funds?

The 75-5-10 rule for diversified mutual funds suggests allocating 75% of the portfolio to equity funds for potential long-term growth, 5% to gold or other precious metals for stability during market volatility, and 10% to debt funds for income generation and risk mitigation. This rule aims to achieve diversification and balance within the investment portfolio, with the remaining 10% left for other asset classes or liquidity needs. Investors may adjust these allocations based on their risk tolerance and investment objectives.

What is the difference between diversified and non diversified mutual funds?

Diversified mutual funds invest in a broad range of securities across different sectors and asset classes to spread risk. These funds aim to minimise the impact of adverse movements in any single security or sector on the overall portfolio. In contrast, non-diversified mutual funds focus on specific sectors, regions, or asset classes. While this targeted approach may offer the potential for higher returns if the chosen sector performs well, it also exposes investors to greater risk if that sector experiences downturns. Diversified funds typically offer more balanced risk exposure and are suitable for investors seeking broader market exposure and risk mitigation, while non-diversified funds may be preferred by those looking to capitalise on specific market opportunities.

How do you choose diversified mutual funds?

To choose diversified mutual funds, start by defining your investment goals and assessing your risk tolerance. Research various fund options across different categories, looking for consistent performance, low expenses, and experienced management. Review fund holdings to ensure adequate diversification and alignment with your objectives. Evaluate historical performance relative to benchmarks and peers, considering fees and expenses. If needed, seek guidance from a financial advisor to make informed decisions tailored to your financial situation and goals.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.