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Diversified Equity Mutual Funds

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Diversified Equity Mutual Funds
October 15, 2024

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A well-diversified equity fund, commonly referred to simply as a diversified equity fund, invests in companies regardless of whether they are large caps or mid caps or small caps.

What is a Diversified Equity Fund?

A diversified equity fund invests in companies regardless of size and sector. It diversifies investments across the stock market in a bid to maximize gains for investors. They are offered by unit-linked insurance plans / ULIPs, mutual funds and other investment firms.

Companies listed on the stock exchange come in all sizes and categories.

There are

  1. large companies also called large caps, due to their huge market capitalization or market caps
  2. mid-sized companies or mid capswith medium capitalizations
  3. smaller companies or small caps with smaller market capitalizations

How Does a Diversified Equity Fund Work?

On the same lines, a diversified equity fund invests in companies across sectors and industries. This way it can participate in growth across the economy and is not tied down to a particular sector or industry.

They can choose to invest in companies from -

  1. Pharmaceuticals
  2. Technology
  3. Engineering
  4. Automobiles
  5. Power / Utilities
  6. Banking and Financial Services
  7. Oil and Gas

Put simply, a diversified equity fund invests in companies across sectors, industries and market capitalizations.

Diversified equity funds of both ULIPs and mutual funds are launched with the specific purpose of giving investors the opportunity to benefit from financial growth of companies of all sizes and across industries and sectors. The investment guidelines vary across ULIPs / mutual funds and investors are informed of this through product literature / company websites.

Who Is It Ideal For?

For an investor with appetite for equities and long-term goals like retirement planning, saving for child's education or child's marriage, diversified equity funds either on a standalone basis or in a portfolio with other investments can prove useful.

FAQs on diversified equity mutual funds

Q: What is a diversified equity mutual fund?

A diversified equity fund is a mutual fund that invests across different sectors and industries instead of just investing in a variety of stocks. This enables diversified  equity funds to give you a broader exposure to equity markets across different stocks and sectors.

Q: What is the difference between an index fund & a diversified equity fund?

Unlike diversified equity funds that invest in a variety of stocks across different sectors & industries, an index fund invests only in stocks that can imitate the performance of stock market indices such as Sensex and Nifty5.

Q: Is diversified a good investment?

Yes, diversified equity funds can prove to be a good investment option for investors who prefer a diversified portfolio consisting of stocks from various sectors as well as industries instead of relying on a single one. Diversification helps reduce your overall risk factor and boosts overall returns, too.

Q: Which type of fund gives the highest return?

The best returns in mutual funds can fluctuate over time, influenced by factors such as economic conditions, stock market trends, and the performance of specific mutual fund houses. While some funds may outperform others in certain periods, it’s important to remember that past performance does not guarantee future results. When selecting mutual funds, it’s crucial to choose those whose investment strategies and expected returns align with your risk appetite and financial goals.

Additionally, consider Unit Linked Insurance Plans (ULIPs), which combine investment and insurance in one product. ULIPs allow you to invest in a variety of funds, including equity, debt, or balanced funds, providing the potential for high returns similar to mutual funds. However, ULIPs also carry additional features such as life insurance coverage, which can add an extra layer of financial security.

Ultimately, the choice between mutual funds and ULIPs will depend on your investment objectives and the level of risk you’re comfortable with. By carefully assessing these options, you can build a portfolio that aligns with your long-term financial aspirations.

Q: What are the risks of diversification?

Although the primary aim behind diversification is the reduction in the overall risk of your portfolio, a risk that comes with diversification is 'over-diversification' or duplication. While it's true that diversification, when done properly, boosts your overall investment portfolio's returns and lowers the overall risk, make sure you do not end up over-diversifying your portfolio, as that can lead to duplication. In case of duplication, while your portfolio may look diversified with lots of mutual funds, it would actually be just duplication, implying you may have many funds but of similar type and category, which would thus not offer diversification to your portfolio.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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