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What are Equity Funds?

| Monday, November 22nd, 2010

Equity funds are a type of mutual fund that invests primarily in stocks. Often referred to as “stock funds,” this type of mutual fund is categorized based on a number of factors, such as whether it is based on international or domestic investments. For example, some funds may be based on investments from a single country, while others may focus on a broader or even narrower market. There are also stock funds that focus on specific business sectors. Equity funds are also categorized based on the overall investment style of the fund’s holdings or the company size, which is why they are often referred to as small, mid or high cap funds. Because of the focus on stock investments, equity funds provide a greater amount of risk as compared to safer investments such as bonds. As such, they are a good choice for some investors, while being a bit too risky for others.

Understanding Equity Funds

An equity fund will usually mirror the ups and downs of the overall stock market. Of course, the overall profitability of the fund will depend on the performance of the actual stocks included in the fund, but during an overall “down” market, you can expect loses. The stock mix is important when investing in an equity fund. A fund that includes a broad diversity of stocks is usually considered to be less risky than those which contain stocks from a narrower market. It’s also important to factor your entire portfolio into the decision to invest in equity funds. For example, if your investment portfolio also includes other safe investments such as bonds, you might want to increase your profit-making potential by investing in a higher-risk equity fund. However, if your investment portfolio is less diverse, you will probably want to stick with equity funds that are designed to produce only a medium level of risk factor. Overall, equity funds are a good way of maximizing investment profit potential, while still experiencing less risk than investing in an individual company’s stock. Different equity funds also have different risk management strategies. A fund with an aggressive risk management strategy may experience less of a loss during a down market as compared to the overall market. However, in most cases, equity funds have only a moderate amount of risk management, which means they will closely mirror the ups and downs of the overall market.

Choosing the Right Equity Fund

Although there probably isn’t an absolute “right” or “wrong” equity fund, there are those which may be more advantageous for your individual investment strategy. An equity fund that invests in smaller companies that use their earnings for growth instead of dividends tends to be more risky. These funds are usually referred to as “aggressive growth” or “Small Cap” funds. There are also equity funds which invest in companies which are expected to grow at a steadier and slower pace, which are referred to as “long-term growth” or “High Cap” funds. Depending on your investment needs and the rest of your portfolio, you’ll need to evaluate the potential for larger returns against the inherent risk factors.

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