What Exactly Is an Equity Fund?

A mutual fund or exchange-traded fund (ETF) that invests in common stocks, or "equities," rather than bonds is known as an equity fund.

What Exactly Is an Equity Fund?

An equity fund is an open-end fund, such as a mutual fund or ETF, or a closed-end fund, such as a unit investment trust (UIT), that purchases ownership in businesses (hence the term "equity"), most commonly in the form of publicly traded common stock. In contrast, a bond fund or fixed-income fund is primarily invested in bonds. Stock fund is an alternative name. It should be noted that equity funds can be purchased as both traditional mutual funds and exchange-traded funds (ETFs). Some investors prefer one type over the other, but both have benefits and drawbacks depending on how the mutual fund is structured and the investor's financial goals and circumstances.

How an Equity Fund Operates

An equity fund scheme involves investors contributing money to a fund, which pools that money and invests it in stocks, allowing investors to profit (or the losses). The fund chooses the stocks based on its objective and investment style, which can vary greatly. Assume Fund A invests based on market capitalization and follows a growth investment strategy. It may choose to invest in small-cap stocks, which have a higher potential for growth and volatility than large-cap stocks. The common denominator among all equity funds is capital appreciation or an increase in the value of the investment. On the other hand, bond funds are intended to generate income for the investor.

Equity Fund Types

Stock funds are classified into three types: those focused on market capitalization, those focused on geography, and those focused on a specific investment style.

Equity Funds With a Market Capitalization Focus

Market capitalization, sometimes referred to as market cap, is a metric used to determine how much a company is worth based on its share price and the total number of outstanding shares. As such, these are stock funds that invest in companies with specific capitalization ranges, such as: Mega-cap equity funds: These funds invest in stocks of firms with a market capitalization of $200 billion or more, which are typically industry leaders. Consider Apple (AAPL), Google (or Alphabet, GOOG), and Tesla (TSLA). Large-cap equity funds: One tier below mega-cap funds, large-cap equity funds invest in companies with a market capitalization of $10 billion to $200 billion, such as General Electric (GE), Starbucks (SBUX), or Delta (DAL). Mid-cap equity funds invest in companies with a market capitalization of $2 billion to $10 billion, such as Crocs (CROX) or Spirit Airlines (SAVE). Small-cap equity funds: These invest in firms with a market capitalization of $300 million to $2 billion, such as the information technology firm Unisys Corporation (UIS), though many of these are not household names. Micro-cap equity funds: These funds invest in small publicly traded companies with market capitalizations ranging from $50 million to $300 million.

Geographical Equity Funds

These funds, which are invested in businesses in one or more regions of the world, include: Global equity funds, also known as worldwide equity funds, invest in stocks from all over the world, including those from the United States. They typically avoid distinguishing between domestic and international assets instead of following the portfolio manager's or investment methodology's lead. In fact, some of the funds own the same amount of stock in US companies as domestic equity funds. International equity funds: These funds invest solely in stocks outside of the United States. Country or regional equity funds: These domestic funds only invest in stocks in the investor's or issuer's home country or region. A country equity fund would be one that invests in China; a regional fund would be one that invests throughout Asia.

Investing Style-Specific Equity Funds

These are funds that select stocks using one of four major methodologies:

The top-down strategy
The bottom-up strategy
The growth strategy
The value strategy

Major funds that have implemented each strategy include: Sector- or industry-specific equity funds: These funds frequently use a top-down strategy in which the best stocks in a specific industry or sector are included in the fund. They may be attractive to people who want to put their money into particular kinds of businesses, which may not be a bad idea given that some industries have generated disproportionately high returns for owners. Equity income funds: These funds frequently employ a bottom-up approach in which they look for ownership of companies that pay a sizeable dividend, frequently irrespective of industry. These funds are intended to provide income to the investor rather than capital growth. Growth funds: These funds use the growth strategy, investing in stocks that have a consistent track record of profitability and growth and are expected to continue doing so, such as those in the technology sector. Value funds: These funds use the value strategy to purchase undervalued stocks that are expected to grow significantly in the future.

How to Invest in Equity Funds

Before investing in equity funds, research the fund offerings at major providers. In general, you want an equity fund that has the following characteristics:

The absence of a sales load and low costs as measured by the expense ratio
The underlying portfolio has had little to no turnover.
An investment strategy or philosophy with which you agree
A portfolio that is well-diversified

Portfolio managers who invest the majority of their net worth alongside you in the same assets, putting their money where their mouth is A well-defined mission that explains the types of assets it acquires, why it acquires them, and why it sells them.

A track record of consistent portfolio management

You can also look up fund rankings on the internet. After you've narrowed down your list of possible investments, read the prospectus and statement of additional information for mutual funds (SAI). These documents detail how the mutual fund intends to invest your money and include a wealth of other information that can help you make an informed decision. A registered investment advisor can also assist you in making your decision. When it comes to investing, you have a few options to consider. You can do the following:

Open a direct account with a mutual fund company like Vanguard or Fidelity.
A brokerage account can be used to purchase shares in an equity fund.
Invest in an equity fund through your company's 401(k) or 403(b) plan.
Open a Roth or traditional IRA with a brokerage firm and use it to purchase equity fund shares.

Each year, stock mutual funds and ETFs pay out nearly all of their dividend income (if any) to shareholders. As a result, you must consider your total return rather than just the share price, which can be misleading depending on the level of distributions made over a given time period. Tip: The majority of brokerage houses and almost all mutual fund companies will let you instantly reinvest any distributions, in whole or in part, into more shares of the fund, allowing you to gradually increase your total ownership. The initial investment amount for these funds varies but is frequently as low as $1,000. By enrolling in automatic investments, you can frequently reduce that minimum to $50 or less. There are also several ETFs that are similar to equity mutual funds, but you can trade them from your own brokerage account for low fees.

Mutual Funds vs. Equity Funds

Mutual Funds Equity Funds Invest primarily in stocks. It is possible to invest in stocks, bonds, or debt securities. Attempt to increase your capital. The goals vary and may include generating income. Over time, underlying securities perform well. Although the underlying securities differ, bonds perform better over the long term. Equity funds can be open-end funds like mutual funds, closed-end funds, or unit investment trusts (UITs). They always, however, invest primarily in stocks. A mutual fund collects money from a large number of investors and invests it in stocks, bonds, or short-term debt. As a result, a mutual fund can be either a stock or bond fund, whereas an equity fund will never invest primarily in bonds. Similarly, equity funds have a broad goal of capital appreciation, which may not be true of all mutual funds. For example, a bond fund seeks to provide income to its investors. The underlying securities mix determines the performance of the average equity fund or mutual fund. Stocks have historically outperformed bonds in the long run, so an equity fund may outperform a mutual fund that is primarily invested in bonds over time.

Important Points to Remember

A mutual fund or exchange-traded fund (ETF) that invests in common stocks, or "equities," rather than bonds is known as an equity fund.
Stocks are chosen by funds based on their goal and investment style.
Market capitalization, geography, and investment style are the three main categories.
Individuals can buy mutual fund shares directly from a mutual fund family or through a brokerage account or a retirement plan. They are looking for low-cost equity funds with a diverse portfolio.
Equity funds can be mutual funds, but mutual funds invest more broadly in stocks, bonds, and debt securities.