What are Diversified Funds - Meaning, Benefits, Taxation, Example, How & Who Should Invest

Gaurav Seth
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Gaurav Seth



As the name suggests, a diversified fund is an investment option that invests in various asset classes and different market caps irrespective of the sector or industry. The primary aim of a diversified fund is to maximize the gains while hedging the unsystematic and systematic risk in the entire portfolio. In simple terms, these funds invest across a diverse range of sectors and companies like mining, telecom, banking, infrastructure among others in order to ensure that the portfolio is secured from dramatic movements in one particular sector. These funds invest in various types of stocks that offer growth opportunities to the investors and at the same time helps to reduce the portfolio risk. 


Diversified funds invest on the principle of diversification. This concept is achieved by investing across market caps and asset classes. It assists in reducing the risk in the portfolio and acts as a cushion in case of a negative impact on the performance of a few stocks or securities. The prime objective of diversification is to secure portfolio returns. 
Diversified funds have considerably less risk than certain other categories such as small or mid-caps. The fund managers of these funds opt and switch between large, mid, and small-cap based on the market scenarios. Also, in some funds, they look to add different securities in the portfolio including bonds, debt instruments, REITs, InVITs, Gold, etc. This way, the investors won’t let go of the opportunity of good gains. Due to diversification, the returns from these funds are amplified and lead to growth but this does not mean that they are immune to market volatilities. These can also be affected by market crashes and adverse situations but the direct impact will be a little less than other funds because of the broad exposure. 


1. Goals and Vision:

Your goals and vision must be gaining decent returns while securing the portfolio. Diversified funds are ideal for these types of investors. It’s also ideal for those who want to save up money to meet long-term goals like buying a house or accumulating enough corpus for a certain project.

2. Fund Managers:

A good fund manager is management behind the fund. They are the mind, knowledge, and skills behind the funds. Information about them is available in the public domain so make sure you go through the same. 

3. Fund House:

It is always better to go forward with a fund house having a good reputation and has been in the industry for a few years. Also, it's better if you go forward with investing in a fund that has a sizable AUM. There are several reasons why this is good.

4. Time Period:

Diversified funds are ideal for investors who have a longer time period for investment, say, 1 to 5 years, depending upon the allocation & investment objective of the fund. If you are someone who wants to park funds for a short period, you may opt for debt categories like liquid funds, ultra-short term funds, low duration funds, etc. 


Diversified funds are subject to capital gains tax which is levied according to the holding period which is the period for which you hold the units of the fund -  or the period between buying and redeeming the units. The funds which predominantly invest in equity securities will be subject to equity taxation. The provisions are as follows: 

  1. LTCG of more than Rs. 1,00,000 are taxed at 10% (without indexation).
  2. STCG is taxed at 15%.

For equity, LTCG is applicable when you hold the securities for more than 1 year and STCG is applicable when it is held for less than 1 year.

Those Diversified funds that predominantly invest in Debt instruments and have slightly equity components are subjected to taxation as per Debt. The taxation rules are as follows:

  1. The STCG(Short Term Capital Gains) are included in the income and taxed as per the applicable income tax slab to the investor.
  2. LTCGs on debt-oriented hybrid funds are taxed at the rate of 20% after indexation benefits.

For debt, LTCG is applicable when you hold the securities for more than 3 years and STCG is applicable when it is held for less than 3 years.


1. Risk Cushion:

In the bearish phase of the market, these funds act as a cushion for the gains. Investing across different market caps, sectors and asset classes helps in striking a balance in the portfolio returns. It reduces the downside risk in your portfolio. 

2. Long Term Objective:

Investors can take the most benefit from this fund through investing for the long term. Diversified funds can prove fruitful for achieving long-term financial goals like buying a house, retirement planning among others. Investors who stay invested in these funds for the long term will benefit from the power of compounding and hence assisting in meeting the needs of investors. 

3. Returns:

Based on the market conditions, returns can range from decent to high. In the bullish phase of the market, diversified funds are capable of offering returns above 12-15% and moderate returns lie around that of the index.

4. Accessibility:

Diversified funds provide the investors access to a wide range of companies, sectors, and industries with different market caps under one fund. Investors who can’t invest in all these sectors due to a lack of skills and money can go forward with diversified funds.

5. Different Strategies:

As the funds are invested in different industries and market caps, different strategies are formulated by the fund managers to do the same. This also provides the investors with the same level of exposure to these different strategies which in turn assist better financial planning. 

6. Monitoring Time Span:

Whenever there is diversification in your portfolio, one need not monitor the funds regularly with changing market conditions. Professional fund managers look after a diversified portfolio so investors need not worry about rebalancing or reviewing the portfolio regularly.


As we talked about the whole concept of diversified funds, there are some categories of mutual funds which come under the broad umbrella of the diversified fund as they work on the principle of diversification. Some of these funds are:

  1. Multicap Funds
  2. Flexi Cap Funds
  3. Conservative Hybrid Funds
  4. Aggressive Hybrid Funds
  5. Balanced Advantage Funds


For an investor with an appetite for equities and long-term goals like saving for a child’s education, retirement planning, buying a house or child’s marriage, diversified equity funds either on a standalone basis or in a portfolio with other investments can prove useful.


Here, the investors won’t be able to capitalize on the opportunity for momentum or growth in one sector which is outperforming the share market. The skills of the fund managers are also very significant when it comes to diversified funds, therefore an incompetent fund manager may end up providing fewer returns. 

Frequently Asked Questions (FAQs)

1. What are Diversified Funds?

A diversified fund is an investment option that invests in various asset classes irrespective of the sector or market capitalization. The primary aim of a diversified fund is to maximize the gains while hedging the unsystematic and systematic risk in the entire portfolio.

2. What is the basic principle on which diversified funds work?

Diversified Funds work on the principle of diversification where the investments are spread out in different companies, sectors, and industries with varying market capitalization. 

3. Do diversified funds have any disadvantages?

Yes, diversified funds do have some disadvantages like they can’t capitalize on the opportunity of one particular sector showing growth or momentum. 

4. What are the key advantages of Diversified funds?

Some of the key advantages of diversified funds are:

  1. Accessibility
  2. Exploring different strategies
  3. Cushion to the risks
  4. Less monitoring is required


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