Any equity mutual fund that invests in a variety of businesses and sectors is known as a diversified equity fund. Basic equity funds select roughly 40-60 equities from all listed firms that suit their investing strategy. However, a diversified equity fund typically includes equities from at least eight to ten different industries.
There are several types of equity diversified funds, including large-cap, mid-cap, large-and-mid-cap, multi-cap, small-cap, and tax-saving equity funds (equity-linked savings schemes or ELSS). Diversified equities funds are believed to be less risky and thus more suitable for the average individual investor because they are distributed across stocks and sectors.
Read on to know about the benefits of Diversified Equity Funds and how to choose a Diversified Equity Fund to invest in.
Diversified Equity Funds invest in a wide range of stocks with varying market capitalizations. Due to their high-end market size, large-cap stocks tend to remain stable in poor markets and show moderate appreciation in bull markets. Stocks in the mid-and small-cap groups react to market fluctuations. They appreciate more in bull markets but decline at the same rate in bear markets.
Diversified Equity Funds smooth out the performance discrepancies between various market caps. Even though the large-cap stocks depreciate moderately in a bear market, the mid and small-cap stocks tend to be volatile, keeping a constant equilibrium. Investors with varied risk appetites can put their money in these funds because of their stability.
Financial planners and consultants frequently stress the need of diversifying your investments. The return of the portfolio, not the individual funds, is said to be determined by diversification across asset classes. Investing in Diversified Equity Funds lowers the requirement to diversify your portfolio because you may select a fund that is already diversified based on your investing needs and risk tolerance.
If you want your investments to be more stable, you might put a bigger amount of your money in Diversified Equity Funds and the rest in Small and Mid Cap Funds. Mid and Small Cap Funds, on the other hand, could be perfect investments for you if you are an ambitious investor willing to assume a high risk in exchange for long-term growth.
The fund includes a component that will appeal to all types of investors, including risk-takers, safe bettors, and flexible investors. It also eliminates the necessity for diversification. As a result, if you prefer to handle your own portfolio as an investor, you can lessen your need to diversify to some extent. It provides your portfolio with consistency as well as a moderate to high return range.
There are many plans in the same category, and they all sound appealing. Each one offers a high rate of return or promises to do so in the future. But before you pick a diversified mutual fund to invest in, consider past performance, returns earned versus the category, and the benchmark index. Let’s look at the details of these factors to make the decision process a little easier for you.
A fund that has been in the market for a long time will have a track record of positive returns over time. Compare this return to the returns of the Diversified Equity Mutual Fund Category and the Fund’s Benchmark. The category returns are calculated by averaging the returns of all the schemes in that category. For example, if a Diversified Equity Fund returns 22% annualized over 10 years while the category returns are 18% annualized, the scheme has surpassed the category returns.
Now you must examine the performance of the fund against which it was benchmarked, such as the S& P BSE 100, S& P BSE 200, CNX 200, and CNX 500, etc. These four benchmarks are linked to the majority of India’s Diversified Equity Mutual Funds. If you find that the fund you selected outperformed both the Category Returns and the Benchmark, you should consider investing in it.
A Diversified Equity Mutual Fund’s portfolio might include large, mid, and small-cap stocks. As a result, fund managers can select companies from a variety of industries and market capitalizations. It may be tough for you to keep track of the sectors or stocks inside your selected fund as an investor. As a result, you should look at two factors to see if the returns are consistent: the fund’s historical returns and the volatility of the chosen fund throughout market cycles.
Investing in Diversified Equity Funds can help diversify your investment portfolio and enjoy market stability. However, you should seek the advice of a financial expert when selecting the proper fund for your risk tolerance and time horizon. For more information about investments, particularly in Mutual Funds, visit the Navi Mutual Fund.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully before investing.
Diversified funds are ideal for investors who don’t want to take on too much risk by investing in tiny firms but still want the added benefit of a higher return from emerging stocks. If a person’s risk profile is low to moderate, they should invest in diversified equities funds.
Diversification gives a portfolio an edge, allowing it to maximise returns while minimising risks. While Large Cap funds are thought to be a relatively safe investment, Mid and Small Cap funds are thought to be more risky and volatile.
A 401(k) is often made up of several mutual funds that are intended to last for years; however, if you withdraw from your 401(k) before retirement age, you will face fines and a higher tax rate. This covers not only the amount of money you contribute but also the mutual funds or other investment alternatives you choose, such as bonds.