Reviewed by Aug 27, 2020| Updated on
A diversified fund as the name suggests is a type of an investment fund which invests in various asset classes irrespective of the market capitalisation and sector. The primary objective of a diversified fund is to maximise the returns while mitigating the systemic and unsystematic risk in the entire portfolio.
Understanding Diversified Funds
A diversified fund invests in a wide range of asset classes irrespective of the market sector and market capitalisation, i.e. large-cap, mid-cap, and small-cap. Investing in multiple asset classes help in generating optimum returns with controlled risk.
Unsystematic risks arise when a fund invests only in a particular sector. Diversified funds mitigate this risk by diversifying investment across multiple sectors. Since these funds are not focused on a specific sector or industry and participate in industries across the economy, they are optimised in such a way that investors are offered the highest possible return on the risk applicable.
Factors to Consider
Diversified funds can either be equity-oriented, debt-oriented, or a mixture of the two. While a diversified equity fund invests in multiple companies of different market capitalisation and sectors, the diversified debt fund primarily invests in PSU and private sector debts, government securities, and other money market instruments. A diversified fund not only gives you access to various market sectors but also different asset classes and industries.
Diversified funds can be the best choice for investors who are risk-averse but still wish to invest in the equity markets. Also, it is of utmost importance to own a diversified portfolio for an investor.
Investing in a diversified equity fund will not only ensure that your investments are spread across various securities but also give you the exposure to equity markets. This will help in mitigating the unsystematic risk inherent to one particular sector and generate the best possible return from your investments. Hence, diversified equity funds have also become one of the most sought after funds among investors with a controlled risk-appetite.