Explained: What is an equity diversified fund and what makes it different?

An equity diversified mutual fund is any equity fund which invests across different industries and sectors.

While a basic equity fund picks from among all listed stocks to select around 40-60 stocks that fit with its investment strategy, a diversified equity fund along with a wide number of stocks also tries to pick stocks from across sectors. Typically, a diversified equity fund has stocks from at least 8-10 different sectors.

Within equity diversified funds, there are various categories of schemes, including large-cap, mid-cap, large-and-mid-cap, multi-cap, small-cap and tax-saving equity funds (equity-linked savings schemes or ELSS).

These funds can help you have broad exposure to the equity markets across stocks and sectors. But if you are looking to buy more specific sectors, you can go for sector and thematic funds instead. These will invest either in just one sector or a group of similar businesses that stand to benefit from a specific theme.

Given that diversified equity funds are spread out across stocks and sectors, they are considered to be less risky and, hence, more suitable for the average individual investor. On the other hand, sector and thematic funds have a fewer number of stocks exposed to similar business risks and are more suited for investors who are aware about how to manage sharp risks.