A guide to diversified mutual funds: Meaning, types, and benefits


When investing in mutual funds, one of the most effective ways to manage risk is through diversification. Diversified funds are designed to spread your money across various sectors and market caps, helping you maintain a balanced investment profile.
Let us understand the diversified funds meaning, their structure, benefits, and what to consider before investing.
- Table of contents
- What are diversified mutual funds?
- What is diversification in mutual funds?
- Example - Diversified mutual funds
- Types of diversified funds
- Advantages of investing in diversified mutual funds
- Factors to evaluate before choosing diversified mutual funds
What are diversified mutual funds?
Mutual fund schemes that distribute your investments among various sectors and company sizes are known as diversified mutual funds. These funds help you diversify your investment by spreading it across large cap, mid cap, and small cap companies and also across different geographies or asset classes. The aim of these funds is to mitigate the impact of market volatility and offer a smoother investment experience.
Also Read: What types of mutual funds are suitable for new investors?
What is diversification in mutual funds?
Diversification in mutual funds is the technique used to mitigate investment risk by distributing capital across different categories instead of relying on a particular stock, industry, or sector. Thus, diversified mutual funds seek to balance the investment outlay to cushion against market volatility.
Since market conditions impact each sector and asset class in different ways, the aim of diversified mutual funds is to ensure that losses in one sector might be covered by gains in another. This approach also contributes to the long-term stability of your investing path.
Example - Diversified mutual funds
Investors choose diversified mutual funds because they help spread risks associated with a particular asset or industry. For example, a flexi cap fund may invest across market capitalisations in sectors like technology, banking, and FMCG. Also, relatively stable industries like FMCG can help absorb short-term shocks and keep the portfolio more stable if a cyclical sector takes a hit.
Types of diversified funds
Here are some types of diversified mutual funds. Each is designed to suit different investment goals and risk appetites.
- Multi cap funds: These invest in large cap, mid cap, and small cap stocks, in a predefined ratio.
- Flexi cap funds: Similar to multi cap, but with no predefined ratio which provides fund manager flexibility to adjust investments based on market conditions.
- Hybrid funds: These are a mix of equity, debt and other asset classes. The proportion of investment in each category can vary, depending on the fund’s investment goal.
- Balanced funds: A category of hybrid funds that allocate investments across equity and debt instruments. Balanced advantage funds can tweak the equity-debt ratio based on market conditions.
Advantages of investing in diversified mutual funds
Here are some benefits of diversified funds:
- Risk control: Exposure to various sectors helps in mitigating risk
- Consistent returns: A diverse portfolio provides lower volatility and relatively consistent return potential
- Comprehensive exposure: A single fund provides exposure to various companies across different market sizes and sectors.
- Professional management: The purchasing, selling, and management are done by professionals.
Factors to evaluate before choosing diversified mutual funds
Before investing in diversified mutual funds, consider these key factors:
- Investment goal: Identify your financial goal and check if the fund's investment approach supports it.
- Understanding the fund’s strategy: Review the fund’s objective and how it plans to achieve returns, whether by diversifying across sectors, market caps, or geographies.
- Investment horizon: Diversified funds are generally suitable for long-term investors. A minimum horizon of five years is ideal for better returns.
- Track record and consistency: Analysing the fund's historical returns can give you insight into how consistently it has performed under varying market conditions.
- Risk factor of the fund: Every mutual fund comes with a degree of market risk. Look at the fund's risk profile and ensure it matches your own risk tolerance.
- Expense ratio: Assess the total cost of investment as it can significantly impact net returns over the long haul.
Also Read: What is a mutual fund (MF) fact sheet?
Conclusion
In an unpredictable market, diversification in mutual funds acts like a safety net. By spreading investments across sectors and asset classes, diversified mutual funds offer a balanced approach for those looking to mitigate risk without compromising on long-term growth potential.
Whether you're new to investing or rebalancing your current portfolio, the benefits of diversified funds make them a practical and informed option.
FAQs:
What is the meaning of a diversified mutual fund?
Mutual fund schemes that distribute your investments among various sectors and company sizes are known as diversified mutual funds. The aim of these funds is to mitigate the impact of market volatility and offer a smoother investment experience.
Which is the best type of diversified fund available?
There is no ‘best’ type of diversified fund. It depends on your goals, expected returns and risk appetite. It is always prudent to consult a financial advisor for tailored investment advice.
Is diversification of mutual funds a good idea?
It is a widely used strategy to manage risk. Diversification helps even out the volatility of the market and mitigates sector specific risks.
What is the 75-5-10 rule of diversification?
- At least 75% of a diversified fund’s total assets must be invested in securities and cash issued by different entities.
- Up to 5% of the fund’s assets can be invested in any one company.
- Up to 10% of the fund’s assets can be allocated to the voting shares of any single company.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.