Diversified equity funds are often looked upon as the 'Plain Janes' of the mutual fund industry. 'What's so great about them if you can invest directly in stocks?' is what people have probably told you.

It's time to take a good look at what the seemingly plain diversified equity fund is capable of delivering.

You don't have to go back too far in time. In 2005, the best performing diversified equity fund delivered a return of 80.21%. You read that right! The lousiest actually delivered 23.32%.

Not a single diversified equity fund lost a single penny over the calendar years 2003 to 2005. Even the worst fund returned over 37% per annum during this time period.

• Diversified equity funds get back to basics

In 2006, the returns were more subdued. Nevertheless, the best fund delivered a return of 61.48% and the worst, -3.20%.

Let's say that, 10 years ago, you put in a one-time investment of Rs 10,000 in two funds: HDFC Equity and Magnum Equity. By January 1, 2007, your investment in HDFC Equity would be worth Rs 2,66,763 and Rs 73,185 in Magnum Equity.

The varied assortment

While we talk about diversified equity funds as a category, it will be inaccurate to assume they all have the same focus. In fact, nothing could be further from the truth.

Some like Magnum Midcap, Franklin India Prima, Sundaram BNP Paribas Select Midcap and Birla Mid Cap are focussed on mid-cap stocks.

Some funds like Pru ICICI Growth and Franklin India Bluechip are focused on large-caps.

Birla MNC and UTI MNC are examples of those investing in multinational companies. DSP Top 100 Equity invests in the 100 largest companies.

• Few mutual funds NRIs should look at
  

And that was just the investment focus. They differ on how much they invest in debt (fixed return), equity (stocks) and how much they hold in cash.

The funds will also differ on the number of stocks that each fund manager decides to invest in. Some may have more than a hundred stocks, others around 20.

Picking the right one

As of now, there are over 150 diversified equity funds in the market. And the variety is immense.

If you decide to invest in them, make sure you understand the objective of the scheme and see if it fits in with your investment needs. Don't just blindly invest in any fund or New Fund Offering that hits the stands.

• How to invest in mutual funds 

Ask yourself certain questions:

1. Am I comfortable with the fund's objective?
2. Has the fund manager invested in too few stocks?
3. Is s/he very heavy on either mid- or large-caps?
4. Is s/he holding a huge amount in cash?
5. Has he invested very heavily in just one sector?

In other words, make sure you understand what you are investing in.

We have picked up five good funds, which we will carry tomorrow. Take a look and see if they fit into your profile.

Value Research is a mutual fund research organisation.