Monday, September 26, 2016

FUND FULCRUM
September 2016

Mutual fund industry's asset base rose to an all-time high of Rs 15.6 lakh crore at the end of August 2016, helped by strong inflows in income and equity segments. The industry, comprising 42 active players, had an average asset under management (AUM) of over Rs 15.2 lakh crore at the end of July 2016, which was also the previous high, according to the latest data of the Association of Mutual Funds in India (AMFI). Overall inflow in mutual fund schemes stood at Rs 25,332 crore at the end of August 2016 compared with an inflow of Rs 1.03 lakh crore in July 2016. Of this, income funds, which invest in a combination of government securities saw Rs 28,457 crore coming in while equity and equity-linked saving schemes witnessed an infusion of Rs 6,505 crore. However, liquid funds witnessed a pull out of over Rs 13,000 crore during the period under review. Showing a growing traction for mutual funds among investors, the number of folios has surged by over 21 lakh in the first five months of the ongoing fiscal to around 5 crore, mainly on account of strong participation from retail investors.This follows an addition of 59 lakh folios or investor accounts in the preceding financial year (2015-16) and 22 lakh in 2014-15. In the past two years, investor accounts increased mainly due to robust contribution from smaller towns.

Equity mutual funds witnessed an inflow of Rs 6,505 crore in August 2016, making it the highest in a year, mainly on account of optimistic investor sentiment. This also marks the fifth straight month of positive inflow in equity schemes. Prior to that, such funds had witnessed a pull out of Rs 1,370 crore in March 2016. Equity inflows are on a 1-year high because of positive climate and optimistic environment in both equity and debt markets. A slew of factors contributing to this buoyancy are well spread monsoon, better corporate results, smooth progress on GST Bill and positive data coming from US economy. In addition, monthly SIP (systematic investment plans) has crossed 1 crore SIPs and monthly net contributions through SIP alone is over Rs 3,000 crore leading to higher positive net inflows in equity markets. The robust inflow has pushed the assets under management (AUM) of equity mutual fund to a record high of Rs 4.67 lakh crore at the end of August from Rs 4.5 lakh crore in July 2016.

Piquant parade

PPFAS Mutual Fund, promoted by Parag Parikh Financial Advisory Services Pvt. Ltd. (PPFAS) has changed the name of its flagship scheme PPFAS Long Term Value Fund with effect from September 16, 2016. The only scheme offered by PPFAS Mutual Fund will now be known as Parag Parikh Long Term Value Fund. The fund has changed the scheme name to pay homage to its founder, late Parag Parikh, whose vision and actions have been instrumental in where PPFAS Mutual fund stands today. Given his standing and image in the industry, it has the potential to ensure better connect and recall among investors, as compared to the acronym. As on August 31, 2016 AUM of the scheme was Rs 687.45 crores out of which 12.81% was invested by the promoter group, management, and employees of the fund house.

Leading stock exchange NSE has decided to shift its mutual fund services platform to web-based system from January 2, 2017. Currently, the bourse is operating the MF platform through its fully automated screen trading system — National Exchange for Automated Trading (NEAT). The move to shift to a web-based mechanism would help to centralise transactions in mutual funds as well as streamline operational activities. “NEAT MFSS (mutual fund service system) shall be discontinued with effect from December 30, 2016, (end of business hours),” NSE said in a recent circular. “Only web-based MFSS platform shall be available for transactions in MFSS segment with effect from January 2, 2017,” it added.
Regulatory Rigmarole

SEBI has issued a circular in which it has allowed fund houses to increase exposure in housing finance companies (HFCs) from 5% to 10% of the net assets of the scheme. The circular is applicable with immediate effect. “Presently, the guidelines for sectoral exposure in debt oriented mutual fund schemes put a limit of 25% at the sector level and an additional exposure not exceeding 5% (over and above the limit of 25%) in financial services sector only to HFCs. In view of the role of HFCs especially in affordable housing space, it has now been decided to increase additional exposure limits provided for HFCs in financial services sector from 5% to 10%,” states SEBI circular. SEBI has clarified that such securities have to be rated AA and above and these issuer HFCs are registered with National Housing Bank (NHB). However, the total investment in HFCs cannot exceed 25% of the net assets of the scheme. After the Amtek auto incident, SEBI had reduced exposure limit to financial services sector to 25% of NAV from 30%. The exposure limit to Housing Finance Companies (HFCs) was brought down to 5% of NAV from 10% of NAV.
Karvy and CAMS have started providing feeds of direct plans to SEBI registered investment advisers. They have enabled a registration based and investor consent based data feed sharing with RIAs through their portal. After submitting the RIA registration form, R&Ts will share the login credentials with the RIA. In order to get investors data, RIAs are required to provide the investor consent letter with folio details to R&Ts. Based on the investor consent letter, R&Ts will tag the folio with the RIA code and RIAs will start getting transaction feeds as mail back services. Currently, there are around 450 RIAs registered with SEBI.
SEBI has directed AMCs to disclose the actual commission paid to distributors (in absolute terms) against the investor’s total investments in each scheme in the half-yearly consolidated account statements (CAS). This commission figure will include all direct monetary payments and other payments made in the form of gifts/rewards, trips, event sponsorships etc. by AMCs to distributors. SEBI has asked AMCs to mention that the commission figures are gross and does not exclude costs incurred by distributors such as service tax, operating expenses, etc.“The CAS will also disclose the scheme’s average total expense ratio (in percentage terms) for the half-year period for each scheme’s applicable plan (regular or direct or both) where the concerned investor has actually invested in,” states the circular. Further, SEBI has said that such half-yearly CAS should be issued to all MF investors, excluding those investors who do not have any holdings in MF schemes and where no commission against their investment has been paid to distributors.The regulator has also come out with a format for making this disclosure. The circular comes into effect from October 1, 2016. 
In a major relief to distributors, SEBI has excluded the requirement disclosing TER of direct plans in the half-yearly consolidated account statement (CAS) if an investor has invested in a regular plan. SEBI has come out with a format for making this disclosure in which it has indicated that investors of regular plan would not get information on details of TER of direct plan. Another key change that SEBI has made is the introduction of a footnote in the account statement saying that the commission paid to distributor is excluded of all taxes. Simply put, SEBI has asked AMCs to mention that the commission figures are gross and does not exclude costs incurred by distributors such as service tax, operating expenses, etc.
SEBI has directed AMCs to disclose the actual commission paid to distributors (in absolute terms) against the investor’s total investments in each scheme in the half-yearly consolidated account statements (CAS). This commission figure will include all direct monetary payments and other payments made in the form of gifts/rewards, trips, event sponsorships etc. by AMCs to distributors.
SEBI has decided to come out with a consultation paper proposing certain changes and clarifications in the IA Regulations. The consultation paper proposing certain changes and clarifications in the IA Regulations inter-alia, on the following points:
·         Re-look at the exemption from registration as an investment adviser provided to Mutual Fund Distributors, SEBI registered intermediaries, etc. for providing investment advice as an incidental activity to their primary activity. 
·     Granting of time period of three years to mutual fund distributors who seek to migrate as an investment adviser so as to enable them to obtain necessary certification and to comply with other requirements specified in IA Regulations.
·         Segregation of investment advisory services through a separate subsidiary within a period of three years.
·         Clarification in respect of investment product and investment advice given in electronic/broadcasting media.
·         Applicability of advertisement code to be followed by any person including the investment advisers while issuing advertisement.
·         Restriction on providing trading tips via bulk SMS, email, etc. and restriction on soliciting investors by offering schemes/competitions/games/leagues/etc. related to securities market and covering these activities under the advertisement code as well as under SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
·         Clarity between the activities of investment adviser and research analyst.
·         Clarity on mode of acceptance of fee.
·         Requirement of providing ‘Rights and Obligations’ document to the clients.
·         Requirements for providing Online Investment Advisory Services and Use of Automated Tools.


Digital technology and artificial intelligence will be key enablers to the next phase of evolution of the mutual fund industry in India according to a report titled ‘Mutual Funds: Ready for the next leap’.Technologies such as mobile, social media, big data and analytics, cloud and artificial intelligence are key growth enablers for the mutual fund industry facilitating seamless customer acquisition and real-time efficient processes. These technologies can drive efficiency and cost reduction if adopted across key operations, spanning from transaction processing and fund management to distribution and customer service.“The impact of technology on the mutual fund industry cannot be understated. Tablet and mobile apps are helping increase reach in B-15 locations and the paper-less experience though e-KYC and technology enabled systematic investment plans are tapping the millennial customers. Furthermore, the new digitally powered entrants such as payment banks who are allowed to sell third-party mutual funds through their advanced technology platforms will revolutionize the reach and efficiency of the Indian mutual fund industry.

Monday, September 19, 2016

NFO NEST
September 2016

NFOs of various hues adorn the May 2016 NFONEST.


Motilal Oswal MOSt Focused Dynamic Equity Fund

Opens: September 6, 2016
Closes: September 20, 2016

Motilal Oswal Asset Management Co. Ltd has launched a new fund that aims to rebalance debt and equity, Motilal Oswal MOSt Focused Dynamic Equity Fund. The fund house has devised an index in-house (but validated and maintained by the India Index Services Ltd; a National Stock Exchange’s subsidiary) that takes into account Nifty 50 index’s Price-Earnings ratio, Price to Book ratio and Dividend Yield. A lower value of this index (called Motilal Oswal Value Index or MOVI) indicates that the market valuations are low and therefore attractive. The fund has already decided its equity and debt exposure at various MOVI levels. Based on this matrix, the fund will invest in equities and debt, accordingly. In addition to buying equity shares, the fund will take derivative exposures to a limited extent, to hedge its positions. Investments are decided by a table based on the index and this removes the fund manager’s subjectivity, as is the case with most other dynamic equity funds. The rebalancing will happen once a fortnight. To ensure that it remains an equity fund, the fund will take equity derivatives exposure as well, to hedge its positions. Combined with a pure-equity exposure, its overall exposure will be at least 65% at all times. The market valuations for dynamic allocation will be indicated by the proprietary Motilal Oswal Value Index (MOVI) which is calculated taking into account Price/Earnings, Price/Book, and Dividend yield of Nifty 50 Index. The MOVI helps gauge attractiveness of the equity market. Taher Badshah (equity) and Abhiroop Mukherjee (debt) are the fund managers of the fund.

UTI Capital Protection Oriented Scheme – Series VIII-II

Opens: September 6, 2016
Closes: September 20, 2016

UTI Mutual Fund has launched a new fund named as UTI Capital Protection Oriented Scheme - Series VIII - II (1831 Days), a close ended capital protection oriented income fund. The duration of the fund is 1831 days from the date of allotment. The investment objective of the fund is to endeavor to protect the capital by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as secondary objective. The fund shall invest 70-100% of assets in debt and money market instruments with low to medium risk profile and up to 30% in equity and equity related instruments with medium to high risk profile. Benchmark Index for the fund is CRISIL MIP Blended Index. The fund managers are Sunil Patil and Srivatsa.

IDFC Nifty ETF  

Opens: September 7, 2016
Closes: September 30, 2016

IDFC Mutual Fund has launched a new fund named as IDFC Nifty ETF, an open ended exchange traded fund. The investment objective of the fund is to provide returns that before expenses closely correspond to the total return of the underlying index, subject to tracking errors. The fund will allocate 95% to 100% of assets in securities of companies constituting Nifty 50, the underlying index with medium to high risk profile and invest upto 5% of assets in cash and cash equivalents, money market instruments with residual maturity not exceeding 91 days, liquid and money market mutual fund schemes. Benchmark Index for the fund is Nifty 50. The fund manager is Yogik Pitti.

IDFC Sensex ETF  

Opens: September 7, 2016
Closes: September 30, 2016

IDFC Mutual Fund has launched a new fund named as IDFC Sensex ETF, an open ended exchange traded fund. The investment objective of the fund is to provide returns that before expenses closely correspond to the total return of the underlying index, subject to tracking errors. The fund will allocate 95% to 100% of assets in securities of companies constituting S&P BSE Sensex Index, the underlying index with medium to high risk profile and invest upto 5% of assets in cash and cash equivalents, money market instruments with residual maturity not exceeding 91 days, liquid and money market mutual fund schemes. Benchmark Index for the fund is S&P BSE Sensex Index. The fund manager is Yogik Pitti.

Mahindra Mutual Fund Kar Bachat Yojana

Opens: August 22, 2016
Closes: October 7, 2016

Mahindra Mutual Fund has launched Mahindra Mutual Fund Kar Bachat Yojana - an Open Ended ELSS Scheme with a 3 year lock-in period. Mahindra Mutual Fund Kar Bachat Yojana is targeted at tax payers who can avail of the benefit of deductions allowed under Section 80C of the Income Tax Act 1961. Additionally, since each investment remains locked in for a period of three years, all redemption proceeds are tax free and hence the scheme gives investors an opportunity to build a tax-free corpus over the long term, on investments beyond the 80C limits as well. The Open Ended ELSS fund seeks to generate long-term capital appreciation through a diversified portfolio of equity and equity related securities. The fund’s asset allocation will be 80-100% in equity and equity related securities and 0-20% in debt and money market securities. The fund is benchmarked against the Nifty 200. The fund manager is Mr. Ratish Varier.

Sundaram Long Term Micro Cap Tax Advantage Fund Series III

Opens: August 8, 2016
Closes: November 11, 2016

Sundaram Mutual Fund has launched a new fund named as Sundaram Long Term Micro Cap Tax Advantage Fund Series III, a 10 year close ended equity linked savings scheme. The investment objective of the fund is to generate capital appreciation over a period of ten years by predominantly investing in equity and equity related instruments of companies that can be termed as micro-cap and from income tax benefit available. For the purpose of investment by the fund, Micro cap stock is defined as one whose market cap is equal to or lower than the 301st stock by market cap (after sorting the securities in the descending order of market capaitalization) on the National Stock Exchange of India at the time of investment. The fund will allocate 65%-100% of assets in equity and equity related securities of companies of micro-caps as defined in the objective invest upto 35%-100% of assets in other equity and equity related securities with high risk profile and invest upto 20% of assets in fixed income and money market securities with low to medium risk profile. The fund's performance will be benchmarked against Nifty Small Cap 100 Index. The fund will be managed by S Krishnakumar & Dwijendra Srivastava.


DSP BlackRock Healthcare Fund, DSP BlackRock Children’s Gift Fund, Axis Hybrid Fund Series 35 to 38, Principal Small Cap Fund, Sundaram Smart CNX 100 Equal Weight Fund, and HDFC Equity Opportunities Fund are expected to be launched in the coming months. 

Monday, September 12, 2016

GEMGAZE
September 2016

Diversified mutual funds are those which spread their investments across various sectors or internally within themselves. This is basically done to avoid the risk associated with one specific sector. However from the diversified section you need to find the best one and it is easier said than done. It becomes puzzling when we have more than 100 diversified schemes to choose from and GEMGAZE offers a plausible solution for the same. All the five GEMs of the 2015 GEMGAZE have qualified yet again for the 2016 GEMGAZE.
HDFC Equity Fund Gem
2015 was a testing year for investors in HDFC Equity Fund given its poor showing versus other large cap Indian mutual funds. The fund has invested 99.51% in equities, 75% in large caps and 54.47% in the top three sectors, finance, auto, and energy. One-year return of the fund is 18.96% as against the category average of 19.22%. The 15,858 crore HDFC Equity’s prospects are not blemished by its recent underperformance. Manager Prashant Jain’s investments in public-sector banks such as SBI have hurt performance. The manager has long favoured public-sector banks in his portfolios as he believes that they will be major beneficiaries of India’s long-term structural growth. An unwavering focus on the long term and willingness to back conviction bets are integral to the approach. As a result, Jain will trade near-term pain for long-term gains. Research is central to this investment style, with Jain effortlessly combining top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with robust business models, strong balance sheets, and competitive advantages. He pays heed to valuations while picking stocks, freely combining relative and absolute valuation methods. He typically invests in companies he believes are well-positioned for long-term growth. While constructing the portfolio, Jain is mindful of the benchmark index weightings, but is not benchmark-aligned. His willingness to be disciplined and adhere to his investment style, even when it is out of favour, is noteworthy. Admittedly, the process has its biases. The valuation consciousness coupled with aversion to speculative fare may cause the fund to lag peers in momentum-driven markets. Further, in a downturn, Jain’s policy of staying fully invested could lead to under performance versus peers who get their cash calls right. Yet, the process will hold long-term investors in good stead. 

Sundaram Select Midcap Fund Gem 
Sundaram Select Midcap Fund one of the marquee funds from the Sundaram Mutual Fund stable. The fund has an AUM of Rs. 3,960 crores and is being managed by the well-known fund manager, Mr. S. Krishna Kumar since 2012. Sundaram Select Midcap Fund is one of the consistently performing equity mutual funds in the mid cap category. The fund aims to achieve capital appreciation by investing in high growth mid-cap stocks. The fund defines 'midcap' as a stock whose market capitalization shall not exceed the market capitalization of the 50th stock (after sorting the securities in the descending order of market capitalization) listed with the NSE. As the risk and return grade of the fund is ‘Above Average’ it could be a good pick for those willing to take high risk in order to get higher return by investing in midcap stocks. The 58% assets of Sundaram Select Midcap are currently invested in five sectors - Financial, Automobiles, Textiles, Services, and Engineering. The 3, 5, and 10 year annualised returns of the fund is quite impressive at 30.78%, 18.92%, and 17.947% respectively. The fund has beaten the Benchmark S&P BSE Mid Cap Index with very good margin. The one-year return of the fund is 26.95% as against the category average of 21.31%. The expense ratio of the fund is 2.29% and the portfolio turnover ratio is 25%. True to its nature, the fund can be very volatile in the short term, reflecting the market conditions. It is not for the faint hearted. Apart from general market risk, security risk, the lack of liquidity at times, and higher volatility associated with mid caps stocks could affect the fund and its performance.
ICICI Prudential Dynamic Fund Gem

While it looks like market volatility will remain an issue for at least some more time, funds that contain downsides and handle it well are good bets. The 5,847 crore ICICI Prudential Dynamic Fund, an equity fund benchmarked against the Nifty index, fits the bill. By its mandate, the fund shuttles between asset classes based on market valuations. If valuations turn expensive, equity exposure is cut in favour of debt. Though the fund can invest across market capitalisations, it puts 70-75% (71.34% at present) of its portfolio into large-cap stocks. In its debt portfolio, the fund has usually invested in fixed deposits, other short-term debt instruments, or held cash. In rallying markets, while the fund does not put up chart-topping returns, it still does better than its benchmark and the category. The fund was an early mover into steadier picks in power and energy, and has also upped stake in automobiles. These sectors stand to benefit if recovery gets into full swing. ICICI Prudential Dynamic fund’s exposure to metals and capital goods sectors was hit last year. Some pain is still left due to it but recovery is expected. The fund invests 47.72% in the top three sectors. The expense ratio of the fund is 2.11% and the portfolio turnover ratio is 249%. The one-year return of the fund is 24.86% as against the category average of 21.30%. This is manager Sankaran Naren’s second stint in the fund after running it from September 2006 to February 2011. He returned to the helm in Feb 2012 following a hiatus of roughly a year and Atul Patel has joined him in April 2016. The change in guard notwithstanding, the investment strategy has remained unchanged, as has the fund’s ability to deliver a strong showing. Taking cash calls is integral to the approach. Naren deploys a rules-based approach using the historical price/book value of the market to determine fair value and in turn tweak cash allocations. Reading the macro-economic environment is a strength he uses to take sector bets, favouring those with attractive fundamentals and shifting away where he thinks valuations are stretched. The manager’s philosophy is to ensure the fund performs better than peers when markets fall, even if the strategy hurts performance in rising markets, thereby ensuring a robust performance over a market cycle. The fund’s superlative showing on the risk/return front under Naren bears out his success thus far. Of course, some aspects of the strategy need to be noted. In a sustained bull run, the model will point towards a higher allocation to cash. This in turn may lead the fund to underperform the competition, as evidenced by its lacklustre showing in the sustained bull run of 2014 when high cash allocation and counter-cyclical positioning hurt performance. As the stock-picking strategy focuses on uncovering attractively priced stocks, the risk of being caught in value traps needs to be highlighted. Yet the fund's cause is aided in no small measure by Naren's presence and his flair for making the strategy work. The fund can hold investors in good stead over market cycles.

DSP Blackrock Equity Fund Gem
DSP Blackrock Fund is a 2,487 crore fund that invests 71.39% in large caps and 47.3% in the top three sectors, finance, energy, and automobiles. The expense ratio is 2.31% and the portfolio turnover ratio is 89%. The one-year return of the fund is 23.94% as against the category average of 21.30%. Large and small/mid cap stocks are different beasts that can deliver widely divergent performances. Few managers are adept at investing in stocks across market segments but Apoorva Shah easily makes the cut. He forms views on stocks based on a company’s growth prospects, expected cash flow and other quantitative parameters; a qualitative overlay is also present. His approach combines an in-depth understanding of stocks with elements such as market sentiment, news flow, and momentum. He will tweak his portfolio in response to rising and falling prices with equal swiftness. Interestingly, the manager trades the large-cap portion of his portfolio far more rapidly than the small/mid-cap portion. This is in line with his belief that generally large caps trade closer to their fair valuations. Conversely, he believes that smaller-cap fare need more time to deliver, which in turn necessitates a longer investment horizon. The success of the investment process largely depends on Shah's execution capabilities. He uses his skills to good effect by running a multicap strategy. But it should be noted that he is also supported by one of the most able investment teams in the industry.  With Apoorva Shah relinquishing his responsibility, and Atul Bhole taking over the reins in June 2016 we need to wait and watch.

Birla Sunlife Frontline Equity Fund Gem

The 11,847 crore Birla Sun Life Frontline Equity Fund is a diversified fund with a bias for large cap stocks but it does take advantage of select mid cap opportunities from time to time. A skilled manager and his well-executed investment approach make this fund a compelling choice for investors. Manager Mahesh Patil is evidently mindful of the benchmark index S&P BSE 200 while investing. For instance, he invests largely in stocks chosen from the index. Year-on-year, Patil has ensured that the fund has delivered consistent returns. Its success can be attributed in no small measure to Patil’s deftly implemented investment approach. The manager’s stock-picking has been impressive. A growth bias is apparent as Patil focuses on factors such as ROCE, ROE and earnings growth potential. Despite the benchmark-awareness, Patil is no closet indexer as he is willing to deviate substantially from index weights in individual holdings. Patil also has utilised his understanding of market movements and stock price points skilfully. Tactical plays and a buy/sell pattern within long-held holdings are integral to the approach. But some caveats are in order. In an upturn that is not broad-based--in other words, when some sectors gain significantly more than others--the benchmark-consciousness may cause the fund to under perform peers that invest in an unconstrained manner. In addition, tactical plays add an element of timing risk. Discipline, bottom-up stock picking, and profit booking at opportune moments have stood the fund in good stead. Numbers are in its favor, consistency is clearly visible, and one can comfortably invest in this fund. 

Monday, September 05, 2016

FUND FLAVOUR
 
September 2016
Diversified equity mutual funds are the most popular category of mutual funds among retail investors. Diversified equity funds invest across market capitalizations and sectors. Such active diversification ensures that the negative performance of one sector does not affect the entire portfolio and increases the possibility of making a sustainable return. These funds aim for medium to long term capital appreciation and are suitable for investors having moderate risk profile and investment horizon of at least three to five years. The investments of these funds could be vertical in nature where various sectors and a mix of various market caps are considered for investments. Diversified Equity funds with vertical investments tend to be more diversified than horizontal investments as it provides sectoral and market cap diversification and provides better cover against risk. Having too many large cap funds in your portfolio could stagnate your investment returns. Investing solely in mid and small cap funds could make your portfolio volatile and risky. Diversified Equity funds are that middle path which allows you to invest in all the market caps through one fund. Diversified equity mutual funds which invest across market capitalizations and sectors are ideal long term investment options for retail investors. As such these funds should form a substantial part of an investor's mutual fund portfolio.
Benefits of Investing in Diversified Equity Funds
Diversified equity funds, which invest across market capitalizations, have several advantages compared to funds focused on any particular market capitalization.
Stability in Bull and Bear Markets: Diversified Equity Funds comprise of all markets cap stocks. Large cap stocks due to high end market capitalization tend to be stable in bear markets and show moderate appreciation in bull markets. Mid and small cap stocks respond to market stimulations. While, they show higher appreciation in bull markets, their depreciation is in sync with the bear markets. The differences in the performance of these market caps get balanced in the Diversified Equity Funds. In a bear market the mid and small cap stocks have a tendency to be volatile even if the large cap stocks show moderate depreciation, thereby maintaining a steady balance. Due to this stability it allows investors with a varying risk appetite to park their investments in these funds.

Reduces the Need to Diversify: It is said that diversification in various asset classes determines the return of the portfolio and not the individual funds. Investing in Diversified Equity Funds reduces the need to diversify your portfolio as you choose an already diversified fund depending upon your investing needs and risk taking ability. As an investor, if you are looking for stability in your investments, you could allocate a larger portion of your investments in Diversified Equity Funds and the remaining in small and midcap funds. However, if you are an aggressive investor and ready to take high risk for long term appreciation then mid and small cap funds could be ideal investments for you.
A universal Appeal: The fund has a component to appeal to all kinds of investors: the risk takers, the safe players and the flexible investors. It also reduces the need to diversify. Hence, as an investor if you like to manage your own portfolio then this reduces your need to diversify to a certain degree. It provides stability to your portfolio along with a return range of moderate to high.

Diversified funds have outperformed large cap funds on a fairly consistent basis
Over the last ten years diversified funds, which invested across market capitalizations and sectors, outperformed large cap funds on a fairly consistent basis. Diversified funds have outperformed large cap funds in most years in the 10 year period from 2005 to 2015. Even in the market downturns the performance of diversified funds and purely large cap funds were more or less similar. Thus we have seen that, while diversified funds have outperformed large cap funds in bull markets, their downside risk is limited almost to the same extent as the large cap funds. While diversified funds which invested across market capitalizations and sectors outperformed large cap funds as a category, the difference in returns of top performing funds in both categories on the basis of the last 3 years annualized returns is even bigger. On a 3 year trailing basis, top performing diversified funds have 2 -10% higher returns than their large cap counterparts. The diversified funds which invested across market caps have generated superior risk adjusted returns in terms of alphas compared to the large cap funds.
Choose Diversified Funds wisely
It is plain wisdom that to invest in a diversified equity fund, you need to pick the right one that suits your requirement the best. In reality it is easier said than done. When there are more than hundred equity funds claiming best returns in their schemes, it is quite puzzling to zero in on one. You need to have a set of objective factors serving as parameters while selecting the right diversified equity fund. What matters is the performance of a diversified equity fund against all the parameters. The fundamental thing to remember is that not just one factor makes a diversified equity fund worthy enough to be a part of well-performing mutual fund portfolio. An ideal diversified equity fund must pass all these 6 parameters.
1. Match your investment objective with that of the diversified equity fund
It is of utmost importance that your investment objective is in tune with the diversified equity fund’s investment objective. For example, if you want to avoid risk, it is advisable for you not to invest in a small cap diversified equity fund that invests in small sized companies and can yield volatile returns.
2. Evaluate returns across diversified equity funds within the same class
To compare diversified equity funds within the similar category is one of the essentials for benchmarking a fund. When evaluating a large cap diversified equity fund for investment, you must compare its yield with other matching large cap diversified equity funds. Comparing it with mid cap diversified equity funds will not give you the real picture as the risk-reward relationship between both is too wide to compare. Another factor in evaluating a diversified equity fund is timeframe. Diversified equity funds are designed to deliver returns over long period of years; you should invest in diversified equity funds with a foresight. Evaluating a diversified equity fund over a longer timeframe helps you gauge its performance during boom and bust periods. You can observe the consistency of the returns of a diversified equity fund by its performance during different market phases combined with the category average.
3. Check diversified equity fund returns against the benchmark index
It is mandatory for every diversified equity fund to mention a benchmark index in its offer document. This benchmark index is the signpost to judge if the diversified equity fund has fared well. While evaluating the performance of a diversified equity fund against its benchmark index, you should take into account the longer time period. Those diversified equity funds that outperform their benchmark indices constantly are best suited for investment. In India, most diversified equity funds do better than their benchmark indices over long timeframe. But during choppy times you may find many diversified equity funds lagging behind their benchmark indices. Those diversified equity funds that stay ahead of their benchmark indices during rough times must be earmarked.
4. Evaluate the consistency of the diversified equity fund
Apart from peers and benchmark index evaluation, a diversified equity fund must be judged by its historical performance. Many diversified equity funds do not stay stable over the years. They take a dip during recessions and sometimes even dip below their benchmark indices and category average. Only a handful diversified equity funds perform strongly against all odds and display steady performance. Those warriors who brave rough times and display stability are the ones to add to your portfolio.
5. Check the costs associated with the diversified equity fund scheme
Besides performance analysis, you must consider the costs involved with making investment in that particular diversified equity fund scheme as this affects your net returns from that scheme. Before you make the final decision of investing in a diversified equity fund, you must check its expense ratio. Along with that you should also know the exit load (charges levied by a mutual fund scheme when redeeming within the stipulated period) while asking for redemption from a diversified equity fund scheme.
6. Risk-return analysis of diversified equity funds
To evaluate the performance of a diversified equity fund, it is common to look at its absolute returns. However, that is not enough as diversified equity funds being market-linked are susceptible to stock related risks. Hence, you should not only assess a diversified equity fund on the basis of returns but also take into account the risk involved with the fund.
Safeguard Your Mutual Fund Portfolio From 2008-like Scenarios
If there is one thing that is certain about the equity markets, it is that they will rise and fall. Most of these movements will be minor turbulences, whereas some will be earthshaking. Undoubtedly, a fair degree of risk aversion ensues after every such market cycle, with a number of retail investors 'swearing off' investing in the equity markets (or mutual funds), only to return and repeat the very same mistakes that led to losses in the first place. Unfortunately, renouncing Mutual Fund investments may prove to be an unwise decision for long term savers, who will miss out on the potential for wealth creation that these products offer. And yet, when you put into perspective that there have been times when even established funds with long term track records have seen values dip by 40-50 per cent in bad years, it suddenly becomes apparent why a single such event is enough to scare investors off for a lifetime. These situations can lead to opportunity losses in the long term. There are no iron clad promises in investing. A fund no matter how safe or risky could always surprise you and Diversified Equity Funds are not an exception. Historically it has been seen that long term investments in Diversified Equity Funds have beaten the returns of Bank Fixed Deposits, Gold and PPF returns with a decent margin.
Typically, the core purpose of investing in a mutual fund is not just to get higher returns but also to diversify and reduce your risk. This is more crucial when you are using these equity mutual funds to plan your long term goals like retirement, children’s education etc. You cannot afford to take the risk of sector funds as any negative news on the sector will mean that your long term goals are in trouble. That is surely not something you want. The moral of the story, therefore, is that if you are looking at long term goals it always makes sense to focus on diversified equity funds. You prefer investing in equities through mutual funds for the reduction of risk through diversification. You surely do not want to move away from that core idea.

To conclude, if you would want to continue participating in the long term growth that can only be afforded by equities, while at the same time ensuring that you do not get caught up in a 2008 like scenario, invest in plain vanilla funds, in accordance with your asset allocation policy, continuously through SIPs for the long term for time in the market wins over timing the market.