What is a diversified mutual fund?

Diversified mutual funds offer many benefits and aim at generating high returns by spreading (diversifying) their investments across the market.

Sep 15, 2018 08:09 IST India Infoline News Service

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Mutual funds are of many types such as equity funds, debt fund, diversified funds, gold funds, ELSS, sector funds, among others. Nowadays, one of the preferred avenues of investment in mutual funds are diversified mutual funds. Diversified mutual funds offer many benefits and aim at generating high returns by spreading (diversifying) their investments across the market.
How they work?
Diversified mutual funds invest in large-cap, mid-cap, and small-cap companies across sectors. This helps the fund to balance unsystematic risks and generate high returns. Diversified mutual funds are alternatively known as Flexicap or Multicap funds.
Features of diversified mutual funds:
  • As the name suggests, these mutual funds invest across sectors and market capitalization.
  • Their investments are well-spread, thereby giving the investor the advantage of diversifying investments in different sectors from a single fund.
  • Professional and experienced fund managers manage the fund, thus saving you the hassle of researching and continuously monitoring it.
  • Gives the investor an opportunity to benefit from the financial growth of various companies across sectors and market capitalization.
  • Comes with a broader scope for growth and asset allocation.
  • Removes the need of individual investments across segments, market-capitalizations, and/or industries.
  • Suitable for first-time investors and investors with moderate risk appetite.
  • Risks due to market volatility are mitigated as the investments are well-spread.
Reasons to invest in diversified mutual funds
1. Diversification
This category of mutual funds invests across sectors, industries, and market capitalizations unlike funds such as sector funds, large-cap funds, mid-cap funds that focus solely on a specific sector or market. Spreading the investment across sectors helps investors in overcoming the risks that arise from investing in only one particular fund.
2. Professional management
Diversified mutual funds are managed by professional fund managers who have years of experience in fund management and market research. Individual managing of funds is a complicated process as the investor would need to conduct continuous assessments of the market. Fund managers, however, operate with a team of research analysts who apprise them of the changes in the market and devise strategies accordingly to ensure profitability.
3. Low investment threshold
In flexi-cap funds, the investment threshold is very minimal compared to direct investments in stocks. Investors can start with a minimum investment of Rs500 and can raise the limit as per their convenience. This is very beneficial to investors who have just begun their financial journey or are new to the markets.
4. Lower costs
Mutual funds cost lesser than direct stock investments. Many people invest in same mutual funds, therefore fund managers only deduct a negligible percentage as transaction cost.
5. Ease of investment
An investor can either make lump sum or systematic investments (SIP) in mutual funds. With SIPs, a set amount is deducted from your account and invested at pre-specified intervals. This system is beneficial for investors who cannot invest vast sums in a single go and also inculcates a savings habit and investing discipline in individuals.
Diversified mutual funds are an excellent choice for investors who have just forayed into the market or for moderate risk investors looking to take advantage of the financial growth of companies across sectors.

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