Diversified Mutual Funds

Abhinay Dhole
Abhinay Dhole
best small-cap funds

Diversified mutual funds are funds with absolute diversification amongst all sectors of the economy. Generally, a mutual fund targets a particular sector depending upon its cap-size and earn benefits from the rise of that particular sector. The performance of these sectors associated mutual fund depends wholly on that sector, which makes it vulnerable in times of recession or downfall of that particular sector. So how are diversified mutual fund different from other mutual funds? Let us check.

What are Diversified Mutual Funds?

Diversified mutual funds are funds that do not target specific sectors or companies or do not restrict themselves to a particular cap size for investment in equities of the companies. The companies depending upon their market capitalization are divided into the large-cap (companies with highest market capitalization) mid-cap & small cap. Large-cap companies are generally stable companies with sustained growth, while small cap consists of companies with highly volatile returns due to their amateur nature. Mid Cap consists of companies with slightly stable than small however with lesser market capitalization compared to large cap. Diversified mutual funds invest in all three caps which overall covers sectors such as Pharmaceuticals, Oil & gas (Large cap), Engineering & automobiles (Mid Cap) & Information technology (Small Cap) at a time. As a result of this, the risk is scattered among all sectors and the profits are considerable even in a recessionary market trend. In addition to that Diversified mutual funds give an opportunity to investors to diversify their portfolio via SIP medium from the very first instance.

Types of Diversified Mutual Fund

Since diversified mutual funds invest across all market caps, its distinction in relation to cap-size is difficult. Mutual fund can generally be of many types, depending upon the the type of underlying asset they invest into, and as per the performance of the underlying asset they switch amongst different investment options. Diversified mutual funds are those type of mutual funds which invest purely into equities of companies across all sectors irrespective of their cap-size. Diversified mutual funds are specifically different from the hybrid funds or balanced funds or even sector funds. A balanced fund is a proper mix of debt and equity investment in it, which is totally different from the diversified fund. Whereas a sector fund concentrates on a specific sector like pharmaceuticals, real estate or automobiles. Thus, a diversified mutual fund is mutually exclusive from a balanced fund, sector fund or hybrid fund and has its own characteristics.

Benefits of Diversified Mutual Fund

1. Diversification

As the name suggests, this fund helps you invest in all types of companies, irrespective of their size. Diversified mutual fund, provides you diversification right from the initial investment and helps you spread your money across all sectors. Diversification is very helpful since it is not sector specific. Therefore when a particular sector is suffering from a recessionary trend, diversified mutual fund balance the losses from that sector with gains of other sectors.

2. Low initial investment

To invest in direct stocks your minimum investment amount required is considerably high, compared to any mutual fund. In addition to that investment in direct stock makes the performance dependent upon that stock entirely. However, with the help of diversified mutual fund, the investment gets the benefit of diversification and that too at a very low investment amount.

3. Professionally managed

Unlike direct investment, every mutual fund is professionally managed and regulated. This professional management not only eases out the pressure of switching between stocks in case of their performance stutter, but it also keeps our money in safe hands. Since diversified mutual fund like every mutual fund is managed by a team of research analysts and experts.

4. Easy entry & exit

A diversified mutual fund provides you with easy investment options such as SIP (systematic investment plan) or lump sum investment at any intervals. No mandatory requirement of opening a Demat account or operating in delivery instructions slip etc. Like the entry, the exit is very easy albeit the lock-in period.

5. Portfolio creation

To create a portfolio of stocks takes years of time investment and knowledge gaining. Diversified mutual funds provide you that portfolio without much time and money. Investors looking to create a portfolio, are basically trying to avoid the sector-specific investment as they want to balance their unsystematic risk and generate higher returns. In a diversified mutual fund, investors receive both the features at a minimums amount of time and money.

How to select the diversified mutual funds?

Diversified mutual funds are a tailor-made investment for long term investors. The diversified mutual funds being equity-centric fund, possess higher risk compared to other investment options. However higher risks come with higher gain, therefore investors seeking investment options with 5 years or more tenure can assess this option. Diversified mutual funds can be evaluated primarily based on performance among its associate funds. The main objective in the diversified fund is target companies since this fund in entirety is invested in their equity. Secondly, the expense ratio is must check in selecting any fund, it is no different in the case of this fund. Expense ratio directly affects the outcome of our fund, therefore sometimes a marginal profit may become zero on account of expense ratio. Age is another point in the checklist before choosing a diversified mutual fund. Since diversified mutual fund carries higher risk, a person entering their retirement can skip the idea of investing here. Lastly, tax planning can be measure while choosing the fund, as all mutual funds do not provide the benefit of tax under section 80C.

Top 5 Diversified Mutual Funds

1. Franklin India Focused Equity:

An equity-focused fund, targeting majority in the financial sector. This fund is suitable for capital appreciation, with low risk compared to other funds in this category. With large and mid-cap companies its major target, the following are its highlights.

Duration Return (%)
1 Year9.10
3 Years14.10
5 Years25.80%

Key Information –

Fund Size7300 Cr. Approx.
Expense Ratio0.97%
Minimum SIP5000
PerformanceOutperformed its benchmark Nifty 500 in 5 year period
Risk Moderately high risk
Top HoldingsHDFC Bank, ICICI Bank, SBI bank

2. ICICI Prudential Multicap Fund:

This fund came to birth in January 2013 and is known for its consistent return giving nature. Healthcare, Financial & automobile sectors are its primary target. Consistency is key, it is yet to outperform its benchmark, the following are its highlights:

Duration Return (%)
1 Year9.10
3 Years17.20
5 Years17.40

Key Information –

Fund Size3100 Cr. Approx.
Expense Ratio1.35%
Minimum SIP100
PerformanceRisk-adjusted return is lower compared to its benchmark.
Risk Moderately high risk
Top HoldingsSun Pharmaceuticals, ITC Ltd, Eicher Motors, HDFC Bank Ltd

3. Kotak Mahindra Multicap Fund

An old player in this sector, with construction and finance its main victim. Kotak group is known to be the first Non-banking financial corporations in India, and this fund is among the largest fund in this category following are its highlights:

Duration Return (%)
1 Year8.5
3 Years17.50
5 Years18.60

Key Information –

Fund Size21000 Cr. Approx.
Expense Ratio2.06%
Minimum SIP500
PerformanceDue to high fund size, the returns are affected, however, the risk is lower compared to a benchmark
Risk Moderately high risk
Top HoldingsL&T Ltd, State bank of India, HDFC Bank, Reliance Industries Ltd.

4. Parag Parikh Long Term Equity Fund

A technology sector backed mutual fund with moderate returns. Following are its highlights:

Duration Return (%)
1 Year11.60
3 Years15.30
5 Years16.40

 Key Information –

Fund Size1600 Cr. Approx.
Expense Ratio1.40%
Minimum SIP1000
PerformancePerformance has been up to the benchmark but below par when compared to other funds in the same category
Risk Moderately high risk
Top HoldingsPersistent Systems Ltd, Axis Bank Ltd, Hero Motocorp Ltd

5. Axis Focus Fund

A technology sector backed mutual fund with moderate returns. Following are its highlights:

Duration Return (%)
1 Year5.00
3 Years18.10
5 Years16.90

 Key Information –

Fund Size6700 Cr. Approx.
Expense Ratio2.20%
Minimum SIP1000
PerformanceConsistently outperformed its benchmark.
Risk Moderately high risk
Top HoldingsHDFC Bank Ltd, Kotak Mahindra Bank Ltd, Maruti Suzuki India Ltd
Abhinay Dhole
Abhinay Dhole

Abhinay is an IT Engineer turned content writer. He has a keen interest in the mutual funds industry and closely follows the market movements. He has been working in the personal finance domain for over 2 years.

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