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In India, mutual funds are one of the most popular investment options for retail investors. Today’s common man invests small amounts in mutual funds and earns market returns with less risk. Let’s find the secret to this systematic earning from small investments and learn how to diversify the mutual fund portfolio.
What is a diversified mutual fund?
A mutual fund basket of investment in various asset types across different sectors in the market is known as a diversified mutual fund. It invests in various asset classes, and sectors, and across multiple companies with different market capitalizations.
The beauty of a diversified mutual fund portfolio lies in the double security of funds. The main objective of this is to secure the funds from unsystematic risk associated with specific assets or instruments. Also, mutual funds have low risk associated with it compared to direct investment in equity, debt, and other instruments.
Also read: What are mutual funds?
The need for diversification
Indians have been enjoying an insane stock market return in recent years. For eg; Nifty 50 has given 25.07% returns while Sensex has given 21.93% returns in 1 year. But these returns are accompanied by market volatility, which can be clearly understood by the famous Nifty VIX (Volatility Index).
The diversification also provides the benefit of compounding. An appropriate allocation of funds into diverse instruments provides the advantage of compounding irrespective of any tense market conditions.
When the funds are diversified into different instruments, there is a bit less care needed for any tense market conditions as the risk for the overall fund gets spread with those diverse assets.
Types of diversified mutual funds
- Equity funds – This fund focuses its investment in the equity segment and is a great alternative for people who do not want to enter the stock market . The fund must invest 65% of the assets in equity and other equivalent instruments (derivatives); as per the SEBI mutual fund regulation.
These are some key types of equity funds as mentioned below :
| Fund Name | Specific Investment | Examples |
| Large Cap Fund | 80% Large Cap Stocks | JM LargeCap Fund, Tata Edelweiss Large Cap Fund |
| Mid Cap Fund | 65% Mid Cap Stocks | Quant Mid Cap Fund, Motilal Oswal Midcap Fund, Nippon India Growth Fund, Kotak Emerging Equity Fund |
| Small Cap Fund | 65% Small Cap Stocks | Axis Small Cap Fund, Quant Small Cap Fund, Tata Small Cap Fund, IDBI Small Cap Fund. |
| Multi cap Fund | 75% Equity and Equity related instruments | Baroda BNP Paribas Multi Cap Fund, Nippon India Multi Cap Fund, Quant Active Fund, ICICI Prudential Multicap Fund |
| Flexi cap Fund | 65% Equity and Equity related instruments | Parag Parikh Flexicap Fund, HDFC Flexi Cap Fund, JM Flexi Cap Fund, Quant Flexi Cap Fund |
| Thematic Fund | 80% Specific sector/ theme | HSBC Business cycle FUnd, ICICI Prudential Manufacturing Fund, UTI Transportation and Logistics Fund, Nippon India Quant Fund. |
| Value Fund | 65% Stocks | Nippon India Value Fund, HSBC Value Fund |
| ELSS | 80% Stocks according to ELSS,2005 | Quant ELSS Tax Saver Fund, BOI ELSS Tax Saver, SBI long term Equity Fund |
Also read about this thematic fund: Manufacturing mutual funds: A good bet or hype?
- Debt funds – This fund invests mainly in debt and money market instruments. As per the SEBI guidelines the tenure for such investment spans from 1 day (overnight) to 7 years or specific instrument maturity.
These are some famous debt funds:
| Fund Name | Specific Investment | Examples |
| Liquid Fund | 91 Days maturity Debt and money securities | Aditya BSL Liquid Fund, BOI Liquid Fund, Bandhan Liquid Fund. |
| Money Market Fund | 1 Year maturity Money market securities | Aditya BSL Money Manager, UTI Money market, Tata Money market. |
| Gilt FundCredit Risk Fund | Min 80% in G-secs till maturity | Invesco India Gilt Fund, DSP Gilt Fund, Axis Gilt Fund |
| Floating Rate Fund | Min 65% in floating rate securities | DSP Floater Fund, Axis Floater Fund, SBI Floating rate debt Fund |
| Credit Risk Fund | Min 65% AA or below rated corporate bonds | DSP Credit Risk, Invesco India Credit Risk, Kotak Credit Risk Fund |
| Dynamic Bond | Across duration | Quantum Dynamic bond, DSP Strategic Bond, Bandhan Dynamic Bond |
- Hybrid funds – The blend of investments in various asset classes such as equity, debt, and gold (sometimes) is used in hybrid funds. It helps in diversifying returns and risks associated with those instruments and focuses on growth as well as income for the fund.
These are some types of hybrid funds:
| Fund Name | Specific Investment | Examples |
| Balanced Fund | 40%-60% in equity & debt; in debt | Quant Absolute Fund, ICICI Prudential equity and debt Fund |
| Multi-Asset Allocation | Min 3 asset class inv, at least 10% in each | Quant Multi Asset Fund, UTI Multi Asset Allocation |
| Conservative Hybrid | 10%-25%Equity & related; 75%-90%Debt | Kotak Det Hybrid Fund, HDFC Hybrid Debt Fund |
| Aggressive Hybrid | 65%-80% Equity & related; 20%-35%Debt | JM Aggressive Hybrid Fund, Invesco India Aggressive Hybrid |
Factors to consider while diversifying mutual fund portfolio
- Investment objectives- The investor should first decide the objective for investment like retirement planning, a child’s higher education, fund needs, etc. This also helps in determining the period for investment
- Returns – The returns associated with different assets in the portfolio should be well assessed before investing. This helps in tapping investment opportunities at the correct time in the market.
- Expenses ratio – The fees paid to the fund manager is the expense for the investor. This expense in ratio with the returns earned from the fund should be checked before investing.
- Risk horizon – Every investor’s risk-taking ability differs. Thus, understanding the unsystematic risk associated with different funds becomes crucial while investing.
Read this to know more: Mastering mutual fund evaluation: 5 Key metrics you need to know
Bottomline
The mutual fund industry today has grown 6 folds in the past 10 years. Following proper diversification and discipline, it holds immense potential for investors to earn more returns with small investments. With the right choice of diversified mutual funds, investors can have a wide array of choices.
FAQ
A mutual fund scheme that invests in various asset classes is popularly known as a diversified mutual fund. They help spread risk and returns by investing across diverse instruments.
Some of the best diversified mutual funds are Quant Mid Cap Fund, Aditya BSL Liquid Funds, JM Large Cap Fund, Nippon India Growth Fund, and Motilal Oswal Flexicap Fund.
The multicap equity fund, flexi cap equity fund, credit risk fund, money market fund, hybrid funds, and balanced funds are some of the most famous and best diversified mutual funds examples.
Diversification safeguards mutual fund portfolios from volatility in the market. Also, it helps compound returns and takes less effort to maintain the portfolio.