Diversified equity funds invest across market capitalizations and sectors. Such active diversification ensures 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 suitable for investors having moderate risk profile and investment horizon of at least 3 – 5 years.
The investments of these funds could be vertical in nature where various sectors and a mix of the 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. Across the industry diversified funds are also known as Multicap Funds, Flexi Cap Funds or Large and Midcap Funds.
Having too many Large Cap Funds in your portfolio could stagnate your investments 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 the all market caps through one fund.