What is Diversification?
Diversifying investment in portfolio means optimizing risk by investing across different asset classes. Diversified equity fund portfolio that invest in a diverse mix of securities across sectors. . Its objective is to generate capital appreciation from a portfolio of predominantly equity related securities.
Diversified equity funds,
Diversified equity funds have exposure to multiple sectors so even if some sectors perform poorly, other decent performing sectors can make up for others. Diversified equity funds are therefore relatively less risky than other category equity funds. The performance of a diversified equity fund can be benchmarked against the average returns of other diversified equity funds in the market, or the best performer in that category. Normally they are benchmarked against a diversified index, like BSE Sensex or S&P CNX Nifty or CNX 100 or S&P CNX 500 or BSE 200 or BSE 500 a benchmark.
Generally the investment strategy for these Scheme is to actively manage a diversified portfolio of stocks without bias towards market capitalization to generate opportunies for long-term growth in capital. The portfolio seeks to have a mix of all market capitalization on (Large, Mid and small) segments in varying proportions depending on outlook. Any stocks are analysed for its investments merits – competitive position, earnings growth, management quality etc prior to inclusion in portfolio and will be monitored on an ongoing basis. The returns would be commensurate with the levels of risk taken in the portfolio and the portfolio would be structured to incorporate reasonable liquidity by the use of cash and cash equivalents.
Some diversified equity funds invest in large companies; or others also focus on mid-cap stocks. A diversified equity fund that has chosen mid-cap stocks as its investment universe, can benchmark to mid-cap indices like CNX Midcap or Nifty Midcap 50 or BSE Midcap. Diversified funds can be part of the core portfolio of every investor.
It also can be said that equity returns are a function of sector and stock selection. Investors can also seek for a secular growth in a diversified mix of equity stocks when the economy does well.
Asset Allocation for Diversified equity funds
Equities and equity related instruments can be allotted minimum 70% to maximum 100% of total assets. Debt and Money market instruments and CBLO forms allotted minimum 0% to maximum 30% of total assets.
Advantages of Diversified equity funds
Diversified equity funds reduces Non-systemic risk. Non-systematic risk is unique to a company; the non-systematic risk in an equity portfolio can be minimized by diversification across companies of different sectors. Diversification across helps reduce the impact of underperformance in any one equity asset class.
For example diversified equity funds portfolio for understanding purpose.