What are Diversified Mutual Funds?

Think of a diversified mutual fund as a buffet dinner. Just like how a buffet offers a variety of dishes, a diversified mutual fund invests in a variety of asset classes. It doesn’t matter what the market size or sector is, this fund is all about variety! The objective? To enhance capital while mitigating risk. It’s like having your favorite dishes without overeating any single one!

Balancing the Risk- Imagine a seesaw. On one side, you have small-cap funds that have the potential to perform positively during bull markets. On the other side, you have large-cap funds that offer potential stability when markets decline. A diversified mutual fund is like sitting right in the middle of the seesaw. It’s suitable for investors who understand the ups and downs of equity markets and can handle a very high level of risk.

Understanding Diversified Investment Fund

Diversified funds are like world travellers. They invest across different sectors and regions, reducing the risk of unpredictable investments. It’s like spreading your travel experiences across multiple countries! Some funds even invest in different asset classes for further risk spreading. The fund manager, acting as the travel guide, considers both systematic and unsystematic risks and tries to mitigate these through broad diversification.

Why Choose Diversified Funds?

For conservative investors, diversified funds act like a safety measures. They present a reduced risk of concentrated losses without forgoing the possibility of returns. So, diversification is structured to provide investors with optimal capital enhancement on their investments, similar to how a balanced diet offers optimal health benefits!

Remember, investing is like a journey. It’s not just about the destination (returns), but also about the ride (risks and rewards). So, buckle up and enjoy the ride with diversified mutual funds!

Types of Diversified Mutual Funds

Having understood the meaning of diversified mutual funds, let's explore their types. Investing strategies determine how diversified mutual funds are classified. The following are the different types of diversified mutual funds:

Multi-cap Mutual Funds

Multi-cap funds are diversified mutual funds. A multi-cap fund manager can invest across any sector or market capitalisation. Thus, the fund manager determines asset allocation in a multi-cap fund. The fund manager may adjust the asset distribution based on the market conditions.

Value Funds

Value funds are diversified equity funds. Their investment strategy is value investing. In these funds, undervalued stocks are invested in. Additionally, value funds invest across sectors and market capitalisations. Fund managers select stocks based on their fundamental valuations. A value fund invests in stocks that are trading below their inherent worth. Fund managers view these stocks as priced below their actual value and there is a minimal chance that they will decline further.

Large and Mid-cap Mutual Funds

Midcap and large-cap funds invest across large and midcap stocks. These funds are diversified equity funds. There is a minimum investment requirement for these funds. A minimum of 35% of total assets must be invested in large-cap companies. Also, a minimum of 35% of total assets should be invested in mid-cap companies. These funds diversify their investments by investing in both large and mid-cap stocks.

Hybrid Funds

A hybrid fund allocates investments in both equity and debt. Hybrid funds include arbitrage funds, balanced funds, aggressive funds, conservative funds, multi-asset funds, and equity savings funds. In a hybrid fund, diversification is only offered across asset classes.

Benefits of Investing in Diversified Funds

Diversified mutual funds are suitable for investors with different investment plans. The following benefits are provided to investors:

1. Access to Various Industries and Companies of Various Sizes

Diversified funds allow investors to invest in companies and industries across various market sizes. They are a suitable option for investors who lack capital or experience to invest in all sectors individually.

2. May act as a Cushion During Market Volatility

Diversified funds may serve as a buffer for portfolio returns during unfavorable market conditions. It can be beneficial to invest across sectors and market capitalisation to enhance portfolio performance. A portfolio's downside risk can be reduced as well.

3. Helps in Achieving Long-term Financial Goals

To achieve long-term financial goals, one can invest in diversified equity mutual funds. Diversified mutual funds help achieve long-term financial goals like retirement, a child's education, marriage, etc.

Investors who allocate their resources to these funds for an extended period may experience the compounding effect of returns, which may assist them in fulfilling their long-term financial requirements. Diversified equity funds can be invested in through SIPs and lump sums. Using the SIP Calculator, they can calculate their potential SIP return.

4. Reduces Portfolio Monitoring Time

As market conditions fluctuate, well-diversified portfolios do not necessitate constant supervision. Fund managers oversee the portfolios of diversified funds. As a result, investors need not worry about regularly reviewing or rebalancing their mutual fund portfolios.

5. Provides Investors with a Variety of Strategies

Diversified equity mutual funds invest across different market capitalisations like multi-cap funds. Alternatively, they can invest across different sectors and use multiple strategies. Also, there are value funds that focus on value investing. In this way, investors can invest in the market using multiple strategies.

6. Access to the Global market

Investors can also tap into international equity via diversified funds. Diversified equity mutual funds invest in global stocks and diversify across global companies. Investors can diversify globally by investing in such funds.

Factors to Consider Before Investing in Diversified Funds

When investing in diversified funds, an investor should consider the following factors:

1.Investment Horizon

For investors with a long-term investment perspective, diversified mutual funds might be appropriate. However, the investor needs to stick with the investment period. In this way, they may obtain significant capital gains. In general, diversified mutual funds are quite volatile. As a result, they may experience high fluctuations in the short term. Nonetheless, the returns may be favourable over the long term. An investment horizon of at least five years may be suitable for diversified mutual funds.

2. Investment Objective

Investing in diversified mutual funds can help investors achieve long-term goals. For example, planning for your child's education, retirement, and marriage. In the long run, these funds may produce favorable portfolio returns due to their asset allocation. Therefore, long-term investors may consider investing in diversified funds.

3. Expense ratio

As with other mutual funds, diversified funds charge a management fee for managing investor funds. This fee is known as an expense ratio. Because these funds are designed to take advantage of changing market dynamics, their turnover ratio is higher. Therefore, their transaction costs are higher.

4. Fund Objective

Funds of this nature allocate investments across sectors to accumulate assets. The key strategy for the portfolio is diversification. As a result, they invest in various sectors and market capitalisations. The fund manager and his team research companies thoroughly before investing in them. Before investing in the fund, they consider factors such as EPS and PE ratios.

5. Return

A well-known fact is that investing purely based on past performance is not a wise decision. Nevertheless, knowing how a fund has performed in the past is essential. By studying past performance, you can better understand how the fund reacts to various market scenarios. Funds that have yielded substantial growth over an extended period despite market turbulence may have the potential to do so in the future, however past performance may or may not be sustained in future.

6. Risks

A mutual fund is a market-linked investment. Depending on the market, diversified mutual funds also have risks. Therefore, the fund manager oversees the portfolio's asset allocation to take advantage of market dynamics.

Conclusion

A diversified mutual fund offers a balanced and risk-reducing investment alternative for investors. These funds strive to enhance capital growth while reducing both systematic and unsystematic risks by allocating investments across diverse asset classes, market sizes, and sectors. During market volatility, investors can benefit from broad market exposure and reduced portfolio downside. However, investors should consider their investment horizon, financial goals, expense ratio, fund objective, historical performance, and associated risks before investing in diversified funds.

FAQs on Diversified Mutual Funds

How does diversification of funds benefit investors?

Diversification aims to spread risk. Investing too much in one company's stock may put you at great risk. If something negative occurs to that company, you may lose a significant amount of money. Thus, to mitigate that risk, diversification is beneficial.

What is the difference between diversified and non-diversified funds?

A diversified investment fund uses a variety of assets and securities to diversify its portfolio. In contrast, a non-diversified investment company typically invests in a single asset category or industry, and in a few securities within it.

What types of investors are suitable for diversified investment funds?

Allocating resources to diversified funds could be a viable choice for investors who prefer not to assume high risk yet desire to gain from the potential of emerging stocks. Thus, diversified investment funds can be suitable for people with low to moderate-risk profiles.

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates, shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as a research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Axis Bank Ltd. is not liable or responsible for any loss or shortfall resulting from the operation of the scheme

Past performance may or may not be sustained in future.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Market caps are defined as per SEBI regulations as below: a. Large Cap: 1st -100th company in terms of full market capitalization. b. Mid Cap: 101st -250th company in terms of full market capitalization. c. Small Cap: 251st company onwards in terms of full market capitalization.