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Investing in mix of sectors help to distribute risk
Portfolio contains a mix of sectors to help distribute risk, best bet for long-term investors
Among the equity schemes available in the market in India, diversified equity funds are the ones in which the highest amount of funds are deployed. These are the schemes which invest their corpus in stocks from across various sectors. Here, the fund manager takes the call on the portfolio of stocks, irrespective of sector, and invests accordingly. Within diversified equity funds, there could be funds segregated according to market capitalization like largecap, mid-cap and small-cap funds.
In addition, there are sector funds which invest in stocks of a particular sector and thematic funds which invest according to some given themes. There are also passive funds and exchange-traded funds.
A financial planning and wealth management firm, a diversified investment model is put in place with the prime objective of avoiding the risks that come with the single sector investment model.
In the risk reward matrix relating to equity and equity oriented schemes, diversified funds come around the middle. The most risky ones are the thematic funds, then the mid-cap and small-cap funds and then the diversified funds. Funds which are less risky than diversified funds are the tax-saver schemes, large-cap, index and then the balanced funds, in that order, the note said.
Predominantly , diversified equity funds invest across various sectors and their mandate is more based on the market-capitalization of the companies they invest in. Even among diversified funds, there are plans which are riskier than others. For example, a small cap fund would be riskier than a large cap fund.
In large-cap funds generally the portfolio allocation towards large-cap companies is more than 90%. Investors prefer these funds as they tend to be relatively stable since a majority of their exposure is to blue-chip stocks, which are well established and rank among the best within their own industry . The main advantage of large-cap funds is that they are considered to be in the low return-low risk segment of diversified equity funds. This ensures that the investments of investors remain relatively safe.
Another category is the multi-cap funds, also called flexi-cap funds. These funds invest in stocks from across sectors and also in across market capitalizations. The fund managers of such schemes can follow the strategy of dynamically changing their allocations to stocks or sectors as per prevalent market conditions, with the aim to invest in sectors which are currently doing well.
Mid-cap and small-cap funds are the other categories among diversified schemes in each of which at least 60% of corpus is invested in mid-cap and small-cap companies. The mid and small companies are expected to grow at a faster rate than bigger ones. However, investment in mid and small-cap funds should be undertaken with caution since these funds are more prone to volatility than large-cap funds as they are hit harder when markets fall.
There are several benefits of investing in a diversified scheme. The key benefits brought in by the diversified equity funds are lower risk because of their diversified nature, broadened and diversified investment options, managed by a professional fund manager so that mistakes are avoided, and easier for the fund manager to move from one sector to another and one industry to another.
Another reason for investing in a diversified equity funds is under different market conditions and market scenarios, different sectors perform differently. Since a diversified equity fund has the flexibility to invest across the spectrum, it tends to perform better than thematic funds over the longer horizon.
These funds also score on the taxation front. Dividends received by unit holders of equity-oriented mutual funds are tax free. Short term capital gains tax is 15%, while there is no long term capital gains tax for these schemes. Long term, here, is defined as more than 12 months
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