diversified equity fund is the best way to tap into the potential of the stock market. How it works is: You invest in a mutual fund. The mutual fund then buys into the shares of different companies in various sectors. This way, your money is spread across different companies. And you get instant diversification.

There are a plethora of diversified equity funds in the market and choosing one is no easy task. But, if you are keen on investing in such funds, then Reliance [Get Quote] Growth Fund is one to consider.

Though this fund has a well-diversified portfolio, it is not a conventional diversified equity fund due to a heavy mid and small cap bias.

It also has a high portfolio turnover (this refers to the number of times shares are bought and sold), and its high cash component.

While we are not telling you to put all your money into it, it can definitely add some spice to your equity portfolio!

The fund has garnered topnotch returns for the third year in a row. After gaining 56% in 2002 and 156% in 2003, Reliance Growth was up another 42.57% in 2004. The NAV of Reliance Growth (growth option) was 118.53 on February 16, 2005.

• Select the right mutual fund
• How mutual funds work

What you must know about the fund

i. It is unique in the diversity of the stocks it holds. Be it large, mid or small cap and growth or value stocks, you will find all sorts of stocks in its portfolio.

ii. Though a major part of Reliance Growth's portfolio consists of quality stocks, it hardly sticks to anything for long. Even if it is Hindustan Lever [Get Quote] Limited, Reliance or Tata Motors [Get Quote], the fund keeps on selling and buying at every rise or fall in their share prices. Thus, on occasion, it gets out of stocks before realising any gain.

iii. It does not hesitate to be the only mutual fund to own a new stock.

iv. It is also more partial to small caps than other diversified equity funds. This has been the biggest contributing factor for the fund's excellent performance. The fund's small cap holdings, like Uniphos Enterprises [Get Quote], Swaraj Mazda [Get Quote], Sintex Industries [Get Quote] and EID Parry, have seen their prices surge manifold since July 2004, when it first diversified into other funds.

v. The fund has also made some smart sector moves. Post 9/11, the fund took a lead by investing heavily in the then hot sectors, technology and public sector undertakings. It lost less when the market dipped mid-2002, due to low investments in the fast moving consumer goods industry. Following the rally in bank and auto stocks in 2003, Reliance Growth increased investments in both sectors. Recently, the fund's higher allocation to technology and engineering stocks added to its superlative performance.

vi. The fund also has a habit of not being fully invested. Even in the current bull run, it has maintained an average 13% of its portfolio in cash, which is higher than its peers.