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Diversified Equity Mutual Funds aim at diversifying investments in companies across a wide range of sectors, irrespective of their size or whether they are large-caps, mid-caps or small-caps. These sectors usually are Pharmaceuticals, Banking and Financial Services, IT, Engineering, FMCG, Oil & Gas, Power and Utilities, Automobiles, Real Estate, etc. Large-caps refer to large companies with vast market capitalisations. Similarly, as their names suggest, mid-caps refer to mid-sized companies that offer medium capitalisations and small-caps refer to smaller companies with small market capitalisations.
The primary aim of Diversified Equity Mutual Funds is to achieve long-term capital appreciation through diversified investments across the stock market. Besides, investing in different sectors also minimise risks, proving to be a smart long-term investment option that accrues good returns even during challenging economic scenarios. Diversified equity funds help investors meet long-term financial goals like children’s education, marriage, retirement plans, etc.
Diversified Equity Funds are offered by mutual funds, ULIPs (Unit-linked Insurance Plans) and other insurance companies. It offers investors the opportunity to benefit from the economic growth of the company that they have invested in. When a company achieves financial growth, a certain percentage of these gains automatically get passed on to investors who have invested in the company by purchasing their stocks or shares. As terms and conditions for investments vary across ULIPs, investors are made aware of the guidelines through company websites and product brochures. HDFC Equity Fund, Reliance Growth Fund and ICICI Prudential Dynamic Plan are some good examples of diversified equity funds.
Diversified Equity Funds are categorised into the following basis the size of companies initiating the investments.
Small-cap Diversified Funds: Small-cap Diversified Mutual Funds offer high returns and are best suited for young investors below 35 years of age and with a high risk appetite. It is essential to manage these funds judiciously to reduce the risk of losses and ensure good returns.
Mid-cap Diversified Funds: Mid Cap Diversified Mutual Funds invest in companies with market capitalisation between Rs. 4000 Crores and Rs. 20,000 Crores. These funds are less risky in comparison to small-cap diversified mutual funds and usually offer high returns in the long term.
Large-cap Diversified Funds: Large-cap Diversified Equity Mutual Funds invest in companies with market capitalisation of at least Rs. 20,000 Crore. Investors invest in stocks or shares of renowned blue chip companies that consider Nifty as their benchmark index. Investments in leading global companies ensure minimal risk, fetching good returns at the same time.
Diversified Equity Mutual Funds is suitable across sectors and market caps. While mid-caps and Large-caps invest in specific market capitalisation, multi-cap funds invest across market caps. Investing in different market caps and companies across sectors helps you avert unsystematic risk that may arise from investing in limited sector-specific funds or stocks. These funds are not completely risk-averse. However, if you understand the risks, you can take decisions accordingly.
Fund Managers are experts in portfolio management because they have extensive experience and knowledge about financial research. If you are not a seasoned investor, you can seek the help of a Fund Manager to guide you through unpredictable economic scenarios.
Other than the expertise to anticipate market movements, Fund managers are equipped with a team of research analysts who keep a close watch on changing market trends. They abide by an investment procedure and apply risk management strategies that they have improved upon through the years. You can make the most of the years of experience of these professionals in lieu of a small charge, referred to as an Expense Ratio, which is deducted from the NAV or Net Asset Value (NAV) of your mutual fund.
The diversity is applicable to the price of shares as well, starting as low as Rs. 500 and running into a few lakhs. This makes it a much preferred option for new and first-time investors looking for exposure in the investment market. It is also well suited for those with a low risk appetite.
Investments in diversified equity mutual funds save you from spending on monthly transaction cost that is applicable on non-equity fund investments. Regular portfolio management to overcome booking profits and laggards, and opting for other stocks that show the promise of high capital gains lead to further transaction costs.
Purchase or sale of these funds in volumes ensures higher economies of scale, even if you opt for the guidance of a Fund Manager. What's more, you also do not incur short-term capital gain tax, enabling you to avail higher return on investments. The only additional cost that you need to pay is the minimal expense ratio, which is an annual expenditure.
Diversity in Diversified Equity Mutual Funds further extends to the available modes of investing - Systematic Transfer Plans (STPs) and Systematic Investment Plans (SIPs).
You can opt for a monthly SIP, where a pre-determined amount is deducted from the selected bank account, encouraging a healthy saving habit. STP enables you to initiate a monthly transfer from a debt fund to an equity fund. There are also Systematic Withdrawal Plans (SWPs) that allow you to withdraw a pre-defined amount at regular intervals. You can also seamlessly enter and exit from these schemes as per your convenience.
There is an extensive range of over 450 diversified equity mutual funds offered by as many as 44 asset management companies (AMC). This makes it a challenge for investors to select one that is a perfect fit for their risk appetite and meets their financial goals.
Let's look at a few guidelines that you need to consider while purchasing a diversified equity mutual fund.
One of the primary factors to be considered for benchmarking is comparing funds that are enlisted under the same category. If you are aiming to invest in a certain large-cap diversified equity mutual fund, you have to compare its estimated returns with other large-cap diversified equity funds. Comparing it with small-cap or mid-cap funds cannot be a suitable yardstick for accurate estimates, since the risk-reward relationship varies among the market caps. While evaluating diversified equity funds, you also have to assess the long term returns that they are expected to deliver basis their performance in the recent past. This is because equities offer higher returns when you invest in them for a period between 3 years to 5 years. Therefore, calculating their expected returns for a period below 3 years would not give you a conclusive picture of how the fund has been performing over a stock market cycle. Evaluating the performance of the fund across various market phases in comparison to the category average will help you in analysing the consistency of returns that has been generated by the fund.
All funds are expected to mention their individual benchmark index in their Offer Document. Apart from keeping a tab on the past performance of the fund, you also need to evaluate it on the basis of its benchmark index. Most equity funds perform better than their benchmark indices over the long-term of 3 years to 5 years, unless the economy is faced with turbulence.
Besides comparing a fund with others from the same category and benchmark index, investors should take into consideration the past performance of the same fund as well. This will give you a clear insight into its stability and sustainability during market downturn and across the market cycle. This way you can track the most consistently performing funds and invest accordingly.
Check the additional charges, including the expense ratio, that you will have to bear on investing in the fund as it will affect the net returns of the fund. You also have to be aware of the exit load, that is, the fees levied by a mutual fund scheme on redemption before the pre-determined stipulated period. However, the exit load will not be applicable if you invest in the fund over a long term.
Research on the risks that the fund may undergo on its journey towards generating returns. As most mutual funds are market-linked, they are vulnerable to stock market related risks. The two aspects that you have to update yourself on the volatility of the fund as presented by the Standard Deviation (SD) and risk-adjusted returns evaluated basis the Sharpe Ratio (SR). While SD reflects the degree of risk faced by the fund, SR indicates the return generated by it as per the unit of risk taken. Ensure that the SD is comparatively lower than its competitors and the SR is higher. Check the existing SD and SR as well as its past performance to take your final decision.
Diversified equity mutual fund is an equity-oriented fund that invests across companies, with no restrictions on its size, sector and theme. These sectors include Pharmaceuticals, Banking and Financial Services, IT, Engineering, FMCG, Oil and Gas, Power and Utilities, Automobiles, Real Estate, etc. Diversified equity funds that usually ensure good returns are ICICI Prudential Dynamic Plan, HDFC Equity Fund and Reliance Growth Fund.
An ELSS mutual fund is a tax-saving diversified equity mutual fund with an annual investment limit of up to Rs.1.5 lakhs. ELSS fund schemes have a 3 year lock-in period and offers tax deduction under Section 80C of the Income Tax Act, 1961. You can invest in ELSS funds with a one-time lump sum as well as Systematic Investment Plan (SIP). However, if you opt for an ELSS through SIP, all of your monthly instalments will be locked in for 3 years. ICICI Prudential Tax Plan, Axis Long Term Equity Fund and Reliance Tax Saver Plan are some examples of ELSS.
The following is the list of some recommendable Diversified Equity Mutual Fund Schemes.
|UTI-Focused Equity - Sr I-RP (G)||Quantum Long-Term Equity (G)||ICICI Pru Growth Fund-Sr2-DP (G)|
|UTI-Focused Equity - Sr II-DP (G)||Principal Growth Fund -Direct (G)||ICICI Pru Exp&Other; Services-RP (G)|
|Tata Equity Management - Direct (G)||Principal Growth Fund (G)||HSBC India Opportunities (G)|
|Tata Dividend Yield Fund - Regular (G)||Principal Emerging Bluechip(G)||HSBC India Opport. - Direct (G)|
|Tata Dividend Yield Fund - Direct (G)||Principal Emerging Bluechip(G)||HDFC Small and Mid Cap Fund (G)|
|Sundaram Value Fund - Sr II - Regular (G)||Mirae India-China Consumption (G)||HDFC Top 200 Fund|
|SBI Magnum Multiplier Fund (G)||Mirae India-China Cons. -Direct (G)||Franklin India Prima Plus (G)|
|SBI Contra Fund (G)||L&T; Equity Fund -Direct (G)||Franklin (I) Flexi Cap (G)|
|SBI Contra Fund - Direct (G)||ICICI Prudential Multicap Fund (G)||Edelweiss EDGE Top 100 -Direct (G)|
|Sahara Growth Fund (G)||ICICI Pru Value Fund - Sr 6-RP (G)||Edelweiss EDGE Top 100 -Direct (G)|
|Reliance Vision Fund - RP (G)||Axis Focused 25 Fund - Direct (G)||DSP-BR Opportunities - RP (G)|
|Reliance Close-End Eqty-2-Sr-A (G)||Axis Equity Fund (G)||BNP Paribas Dividend Yield -Dir (G)|
|Reliance Close Ended Eqty-Sr-A-DP-G||Axis Equity Fund - Direct (G)||BNP Paribas Dividend Yield (G)|
|Quantum Long-Term Equity (G)||Birla SL Advantage Fund -Direct (G)||Birla Sun Life Equity Fund (G)|
|Principal Growth Fund -Direct (G)||Birla SL Advantage Fund (G)||Birla SL Dividend Yield -Direct (G)|
|Principal Emerging Bluechip(G)||Birla SL (I) Opportunities (G)||Birla SL Dividend Yield (G)|
|Peerless Equity Fund - Direct (G)|
What is the meaning of diversified mutual fund?
Diversified Equity Mutual Funds aims at diversifying investments in companies across a wide range of sectors, irrespective of their size or whether they are large-caps, mid-caps or small-caps. These sectors usually are Pharmaceuticals, Banking and Financial Services, IT, Engineering, FMCG, Oil & Gas, Power and Utilities, Automobiles, Real Estate, etc.
What is a non-diversified mutual fund?
In contrast to diversified equity mutual fund that follows no restrictions in size, theme or sector of the company that it invests in, non-diversified funds usually invest in companies belonging to a specific asset industry or category, and also in a few securities from each industry.
What is diversification in mutual fund?
Diversification in mutual funds indicates that investments are not restricted to shares or stocks of companies. Investments can also include other assets like cash, bonds and even commodities such as gold and other precious metals. This enables investors to control the risk that may be involved in a certain stock or sector. Not just that, it also offers the scope of potential rewards through wider exposure to a varied range of stocks and sectors.
Is an index fund a diversified fund?
An index fund can be classified under the category of diversified equity mutual fund with a portfolio that specialises in tracking the market index components like Standard & Poor's 500 Index. An index mutual fund is synonymous with higher market exposure, low portfolio turnover and restricted operating expenditures.
What is a hybrid mutual fund?
A hybrid fund involves diversification among two or more asset classes. It is a type of investment fund that invests in a mixture of bonds and stocks.
How much return can I expect in next 5 years from diversified funds?
On your diversified mutual fund can be estimated through the following formula:
Diversified Fund Returns = Real GDP Growth Rate + Inflation + P/E expansion delta + Market segment risk premium + Fund Manager Alpha The real GDP growth and inflation determine the Earnings Per Share (EPS) growth of the overall economy. When you add the P/E expansion (Price-to-Earnings) of the market, which is the benchmark, you will arrive at the estimated return on your diversified mutual fund. Market segment risk premium is unique to every fund. Historical returns do not usually determine future returns, but an estimate of market benchmark index returns may enable investors to get an idea of the alpha that the Fund Manager has created. The alpha generated by your Fund Manager is directly proportionate to the wealth created over a long term, that is, the higher is the alpha created, the higher will be the return on investments.