What is an equity fund?

An equity fund is a special type of mutual fund or exchange-traded fund (ETF) that invests in common stocks instead of bonds. These funds select stocks based on their objectives and investment styles. The main categories of equity funds are those based on market capitalization, geography, and investment style. Individuals can invest directly with a family of mutual funds or purchase fund shares through a brokerage account or retirement plan. They seek low-cost equity funds that provide diversification.

How does an equity fund work?

The operation of an equity fund is summarized in that investors provide money to the fund, which pools this money and invests it in stocks, allowing investors to gain profits (or losses). The fund selects stocks based on its goals and investment style, which may vary significantly. For example, Fund A invests based on market capitalization and follows a growth investment style. It may invest in small-cap stocks, which have greater growth potential and volatility than large-cap stocks. However, the common factor among all equity funds is the aim of increasing investment value. In contrast, bond funds are designed to accumulate income for the investor.

Types of equity funds

There are three main types of equity funds: those focused on market capitalization, those focused on geography, and those that follow a specific investment style.

Market Capitalization-Focused Equity Funds

Market capitalization is considered an indicator of a company’s value based on its stock price and the number of shares outstanding. As such, these funds target stocks in companies with specific capitalization ranges, including:

Large-cap equity funds: These funds invest in stocks of companies with a market capitalization of $200 billion or more, which are generally considered leaders in their industries, such as Apple, Google, and Tesla.
Mid-cap equity funds: These funds invest in companies with market capitalizations between $10 billion and $200 billion, such as General Electric, Starbucks, and Delta.
Small-cap equity funds: These funds target companies with market capitalizations between $2 billion and $10 billion, such as footwear company Crocs and airline Spirit Airlines.
Micro-cap equity funds: These funds invest in very small companies with market capitalizations between $300 million and $2 billion, although many of these companies may not be well-known.
Nano-cap equity funds: These funds invest in very small companies with market capitalizations between $50 million and $300 million.

Geography-Focused Equity Funds

These funds invest in companies in one or more regions of the world, including:

Global or international equity funds: They invest in stocks worldwide, including those in the United States. They typically avoid distinguishing between domestic and international assets, following wherever the portfolio manager directs it or the investment methodology. In fact, some funds hold the same amount of stocks in American companies as domestic equity funds.
International equity funds: These funds invest exclusively in stocks outside the United States.
National or regional equity funds: These funds invest in stocks in the investor’s home country or region. For example, a fund that invests in China would be an example of a national equity fund, while a fund that invests throughout Asia would be an example of a regional fund.

Equity Funds

Concentrated Stock Investment Approach

These funds utilize one of the four main methods for selecting stocks: top-down strategy, bottom-up strategy, growth strategy, or value strategy. Key examples of funds that adopt each strategy include:

Sector or industry-specific equity funds: These funds often use a top-down strategy, where the best stocks in a particular industry or sector are included in the fund. They can be appealing for those looking to invest their money in specific types of businesses, which may not be a bad idea since some industries have produced excessively high returns for their owners.
Equity income funds: These funds typically use a bottom-up strategy, seeking to own businesses that pay out substantial financial distributions, often regardless of the sector. These funds are designed to provide income to the investor rather than just capital growth.
Growth funds: These funds employ a growth strategy, investing in stocks with a consistent record of profitability and growth, expected to continue doing so, such as those in the technology sector.
Value funds: These funds utilize a value strategy, seeking to purchase stocks that are undervalued relative to their expected fair value and are anticipated to grow significantly in the future.

How to Invest in Equity Funds

When deciding to invest in equity funds, check the fund offerings from major providers before purchasing. Generally, you are looking for an equity fund with features such as:

Low costs, as measured by the expense ratio and no sales charges.
Minimal trading or no turnover in the underlying portfolio.
An investment strategy or philosophy that aligns with you.
A broadly diversified portfolio.
Portfolio managers who invest a majority of their net worth in the same assets that you are investing in, meaning they put their money where their mouth is.
A clearly defined mission so you understand what types of assets they purchase, why they purchase them, and why they sell them.
A consistent portfolio management history.

Also browse fund ratings online. Once you narrow down your list of potential investments, read the mutual fund prospectus and statement of additional information. These documents explain how the mutual fund plans to invest your money and provide a range of other valuable information that can make informed decision-making easier. You can also solidify your decision with the help of a registered investment advisor.

When it comes time to invest, you have several options that may be suitable. You can:

Open an account directly with a family of mutual funds such as Vanguard or Fidelity.
Buy shares of an equity fund through a brokerage account.
Purchase shares of an equity fund through a 401(k) or 403(b) plan at work.
Open a Roth or traditional IRA at a brokerage firm and use it to buy shares of an equity fund.

Mutual equity funds and ETFs typically distribute almost all the income from earnings (if any) to shareholders annually. Therefore, you should consider total return, not just share price, which may be misleading depending on the level of distributions made during any given time period.

Note: Most brokerage firms and all mutual fund companies will allow you to reinvest any distributions, in whole or in part, into additional shares of the fund, thereby increasing your total ownership over time.

The minimum amount required to start acquiring these funds varies, but it is often as low as $1,000. You can often reduce this minimum to $50 or less by enrolling in automatic investments. There are also many ETFs that mirror mutual equity funds, but you can trade them from your own brokerage account, usually at low fees.

Funds

Stocks vs Mutual Funds

Equity funds can take the form of an open fund like a mutual fund, a closed fund, or a mutual investment fund. However, they always primarily invest in stocks.

A mutual fund pools money from many investors and invests it in stocks, bonds, or short-term debt. Thus, a mutual fund can be an equity fund or a bond fund, while an equity fund will not primarily invest in bonds.

Likewise, equity funds aim for capital appreciation, whereas this may not be the case for all mutual funds. For example, a bond fund seeks to provide income for the investor.

The performance of the mutual equity fund or mutual fund depends on the mix of underlying securities. Stocks have historically outperformed bonds over the long term, so an equity fund may be better over time than a mutual fund that primarily invests in bonds.

Source: https://www.thebalancemoney.com/what-is-an-equity-fund-357477