What Are Diversified Mutual Funds?

Diversified mutual funds offer exposure to different companies and industries instead of investing in just one sector or asset type. This helps spread the risk of concentration.

Let's understand what diversified mutual funds are, how they work, their types, and their benefits.

What Are Diversified Mutual Funds?

Diversified mutual funds are investment vehicles that pool money from many investors and invest it across a wide range of assets, sectors, industries, or market capitalisations instead of concentrating it in a single industry or single market segment, such as large-cap, mid-cap, and small-cap stocks.

Types of Diversified Mutual Funds

The following are the types of diversified mutual funds.

Multi-Cap Funds

Multi-Cap equity funds invest in large-cap, mid-cap, and small-cap companies. As per SEBI rules, they are mandated to invest at least 25% of the fund in each of these three categories.

Flexi-Cap Funds

Flexi-Cap funds invest in large-cap, mid-cap, and small-cap companies, and the fund manager has the flexibility to change the allocation of the funds, based on the fund's goals and market conditions.

Large & Mid-Cap Funds

Large & mid-cap funds invest in both large-cap and mid-cap companies and have to mandatorily invest at least 35% of the investment fund in each category.

Hybrid or Balanced Funds

Hybrid or balanced funds invest in both shares and debt investments and aim to offer market-linked returns from equity and try to lower volatility through debt investments, balancing growth and risk.

Multi-Asset Allocation Funds

Multi-Asset Allocation funds invest in at least three different types of assets, such as shares, bonds, and gold. SEBI rules mandate that they invest at least 10% of their money in each of these asset classes.

Index Funds & ETFs

Index and ETF funds track a market index, such as the Nifty 50 or Sensex, and aim to match the index's performance by investing in the same stocks included in the benchmark index.

How Do Diversified Mutual Funds Work?

In a mutual fund, the Asset Management Company (AMC) pools money from many investors and invests and manages the fund. A fund manager invests the pooled funds in shares, bonds, or other assets based on the fund's goal. When investing, each investor receives a certain number of units, which are based on the money that they invested in the fund. The value of a unit is known as the Net Asset Value (NAV), which determines the value of the fund's investment.

A diversified fund spreads money across different companies and industries, such as IT, banking, healthcare, and energy, instead of investing in just one or two companies, helping spread the risk across different investments.

Benefits of Investing In Diversified Mutual Funds

The following are the benefits of investing in a diversified mutual fund.

Reduction of Risk

Diversified mutual funds invest in stocks or bonds of different companies and industries. This helps reduce the impact of poor performance by one company or sector.

Exposure to Different Company Sizes

Some diversified equity funds invest in large-cap, mid-cap, and small-cap companies, giving investors exposure to companies of different sizes belonging to different market segments.

Professional Management

A fund manager manages the diversified mutual fund and makes investment decisions based on the fund’s goals and objectives.

Affordable Investment Through SIP

Investors can start investing small amounts through an SIP, depending on the fund's minimum investment rules. This helps build discipline and spread unit purchases over time.

Easy Access to Money

Most open-ended diversified mutual funds allow investors to withdraw their money on business days. However, the time taken to receive the money depends on the fund's rules, and some funds may have exit loads or other restrictions.

FAQs

What are diversified mutual funds?

Diversified mutual funds are investment vehicles that pool money from many investors and invest it in different companies, industries, or assets, helping reduce the risk of overreliance on a single asset or industry.

What are the main types of diversified mutual funds?

The main types of diversified mutual funds are multi-cap funds, flexi-cap funds, large- and mid-cap funds, hybrid funds, multi-asset allocation funds, index funds, and ETF funds.

Can I start investing in diversified mutual funds with a small amount?

Yes, many mutual funds allow you to start with a small amount through a SIP, which allows investors to set the SIP amount and the frequency as per their preference.