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What are Equity Funds?

By Jodee Redmond
Updated May 17, 2024
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Equity funds are a type of mutual fund that puts money into different kinds of stocks. Investors buy shares in mutual funds with other people. The fund is managed by a professional fund manager and a team of professionals. They have the resources to research companies and track performance to decide which stocks to buy. Fund managers who look after equity funds also determine how much of each stock the fund should hold.

Along with a variety of stock, equity funds should have a certain amount of money held back in cash reserves. Prospective investors should take a look at the annual report that is published to find out what companies the fund manager has chosen to invest in and how much of the equity funds' assets are put in each one. You will also want to find out where the companies are located. For example, some equity funds buy stocks from small-to-medium sized companies only, while others focus on a particular type of stock.

You may want to buy shares in equity funds that only deal with blue chip companies or focus your attention on a particular industry. Some equity funds deal exclusively in energy or precious metals stocks. Others focus on certain geographic locations and buy stocks in U.S., Canadian, or foreign companies only.

Prospective investors in equity funds need to understand that their investments will rise and fall as the market changes. The investment is not guaranteed. While the fund managers are generally very well educated and experienced, there is no way to predict how the equity markets will behave going forward.

Looking at how equity funds have performed in the past is not a very good way to predict how they will perform in the future. Many people look at the numbers from previous years and use them to make decisions about where to put their money. This may not be the best choice, and investing in equity funds exclusively does carry with it a certain amount of risk.

The good news for investors who are prepared to invest for the long haul with an experienced mutual fund manager is that over time, the stock market has outperformed other types of investment vehicles. If you have the stomach for it and the patience to wait out the inevitable market downturns that will happen, investing your money in quality equity funds can be a wise financial decision.

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Discussion Comments
By robbie21 — On Aug 26, 2011

@Kat919 - One thing to consider when choosing a fund is its fees. This information is publicly available and, obviously, lower fees are better. (It won't be a fee of zero, because it just makes sense that if the fund is going to do all this hard work of picking stocks, you have to pay them something for it.) The fee is expressed as a percentage.

Beyond that, you'll want some diversification. You might want to do mostly index funds, but then you might also put some money into global equity funds to get investment outside the US. You might also seek out a fund or two that strives for higher performance.

If you do not have much to invest, you have two options: you can seek out one good index fund, or you could buy ETFs (exchange traded funds). Normally, mutual funds have a minimum investment of some thousands of dollars (which obviously limits how many you can invest in), but with ETFs you can buy shares in them, just like you could buy a share of stock. You'll run into somewhat higher fees that way. though.

To answer your last question, some mutual funds invest in bonds and other kinds of securities; stocks aren't the only thing out there.

By Kat919 — On Aug 25, 2011

I know that equity mutual funds are a good choice for me right now because I don't have the energy or training to pick stocks myself and I have a long investment timeframe. But how do you go about choosing an equity fund? There are so many out there, it's hard to know where to start.

I'm also confused about what other kinds of funds there are. Don't all mutual funds invest in a variety of different stocks?

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