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INDIVIDUAL investors are unable to select the right kind of mutual fund for their portfolio most of the time. One of the most popular choices is a diversified equity fund and there is a proper way to go about it. If the due process is done properly, then investors will save a lot of time and effort at a later stage in ensuring that they have constructed a sound portfolio.
Here are some of the situations when a diversified equity fund would suit an investor's needs.
Diversified equity funds: Diversified equity-oriented funds are those mutual funds that have a mandate to invest the corpus available with them across different stocks. These funds can put their money in a large number of areas or sectors and the idea is to have a portfolio for the scheme that has its holdings spread out across multiple stocks, so that there is no concentration of risk on one sector or segment. This is an example of an investment that provides the benefits of equity-oriented funds for the investor, and hence, is a simple way to understand the mutual fund investing process. These funds are present in large numbers because most fund houses offer a variety of these funds for their investors, and hence, there is also an ease of selection of the investment when it comes to choosing a particular fund.
Starting up: For those who are actually starting on their investment journey into mutual funds and are beginning to build a portfolio, then these funds are a good route to begin with.
Since these are well diversified, there is a lower amount of risk, compared with, say, a sectoral fund. These funds help the investor get some experience about mutual funds and the manner in which they operate.
Once they are comfortable with the actual position of the investments and the portfolio expands, the investor can consider other schemes that will play their own role.
This is the main reason why diversified equity funds are often the first choice for many portfolios.
Conservative investor: There are also many investors who do not want to take a high amount of risk when they are investing in equities.
These investors are more worried about the downsides than getting large amounts of returns, and for such people too, diversified equity funds are ideal. There is always a risk when investing in equities, but, the investor should ensure that there is control on the exposure to individual stocks as well as sectors, and hence, diversified funds are a right fit because they manage all of these exposures very well. Conservative investors would find this a good route.
Uncertain times: A lot of times, it is very difficult to understand the manner in which the markets will move and on such situations, diversified equity funds actually prove to be one of the best choices for an investor.
When it is not clear how the situation will pan out and there is a large amount of uncertainty, then having a portfolio that is spread out and diversified would be a good way to keep adding investments to the mix and diversified equity funds could be used as an instrument over this entire period to build a corpus.
This ensures that the stage is set for the investor to gain when the market improves.
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