Equity funds pool money from investors to purchase a portfolio of stocks or equity securities. Since their primary focus is stocks, they’re also referred to as stock funds. Equity funds provide an expertly managed, diversified method of stock investing with the prospective for competitive long-term returns.
While stock investing is riskier than other investments, an equity fund can help you spread your investments with stocks from various companies, providing a safeguard from the possibility of stocks underperforming. Discussed below is what you need to know about investing in equity funds.
1. Types of equity funds
There are two primary classes of equity funds, including:
- Actively managed funds: These are equity funds usually managed by portfolio managers who pick the right stocks to buy and where to invest after active research and analysis. These managers use different strategies and their expertise to determine whether to buy, sell, or hold stocks in the fund’s portfolio. If you wish to invest in actively managed funds, such as this Australian share fund, use legitimate investment opportunity providers who have a team of skilled portfolio managers with solid decision-making abilities to ensure success
- Passively managed funds: They provide a more long-term investment strategy where you buy and hold a diversified asset portfolio and attempt to match the market instead of outperforming it. Exchange-traded funds (ETFs) are an example of passively managed funds which doesn’t depend on a fund manager
When choosing between active and passive equity funds, consider your investment goals, philosophy, and risk tolerance. Other types of equity funds are based on:
Market capitalization
Here, equity funds are classified depending on the size of the firms they invest in. The funds in this category include small-cap, mid-cap, and large-cap funds.
Growth vs. value
The funds in this class of equity funds include:
- Growth funds: They invest in company stocks anticipated to have more accelerated earnings growth, usually defined by higher P/E (price-to-earnings) ratios
- Value funds: They buy stocks seen as undervalued in regard to fundamental analysis and usually have higher dividends, low P/B (price-to-book) ratios, and lower P/E ratios
Geographic and sector specialization
Equity funds in this category are classified based on specific geographic areas or sectors. They include:
- Geographically-focused equity funds: They buy company stocks from around the world. International funds purchase stocks from firms mainly outside your (investor) home country, while domestic funds buy stocks from companies in your home country
- Sector funds: It involves investing in stocks of firms operating in a specific market sector or industry
2. Benefits of investing in equity funds
Equity fund investing comes with numerous benefits, including:
- Diversification: Putting your money in equity funds allows you to spread your investments across various assets, mitigating the risks associated with investing in individual stocks
- Expert fund management: Asset management companies provide professional fund management that comes with several advantages, including risk mitigation strategies, market expertise, and more
3. Risks of equity fund investing
While equity fund investing is lucrative, it comes with several risks, including the following:
- Volatility: Equity fund investing comes with a higher possibility of price fluctuations, making it unsuitable for those with short-term investment goals
- Market risks: Risks, such as geopolitical events, economic downturns, and news events, can result in equity fund prices dropping significantly
Endnote
While equity funds are profitable and can help diversify your portfolio, they come with risks. Understanding everything about equity fund investing can help you make informed investment choices.
