Making Money with Equity Funds

The vast majority of mutual funds are also equity funds. An equity fund is a mutual fund that invests solely in stocks. Here are the basics of equity funds.

Equity Funds

With an equity fund, you will be pooling your money together with many other investors. In some cases, you could potentially be investing with millions of other people. A fund manager is going to be in charge of the equity fund. The manager will take the money that has been pooled together and use it to purchase thousands of shares of different stocks. Each shareholder in the mutual fund is a partial owner of each share of stock.

Diversification

Equity funds make it possible for the average investor to diversify her investments. According to many experts, you would need several shares of at least 100 different stocks before you would be close to well diversified. For most individual investors, this is simply not a realistic proposition. Most individuals do not have the money that it would take to completely diversify their portfolios. By buying shares of an equity fund, they can get a portion of a diversified portfolio. This helps to lower the overall risk of their investment while still providing some solid potential gains. By investing in hundreds or thousands of different stocks, you will not have to bear the risk associated with an individual company going out of business. When you are invested in a mutual fund, the bankruptcy of one corporation is not going to hurt the performance of the fund that much.

Types of Equity Funds

There are many different types of equity funds to invest in. Some equity funds are known as growth funds. These funds attempt to identify companies that appear poised for massive growth. These funds tend to be more actively managed than other equity funds. Another type of equity fund is the value fund. This type of mutual fund looks to identify stocks that are currently undervalued in the market. They will buy the stocks, and when the price starts trading at the level that it should be, the mutual fund will make a profit.

Some equity funds choose to invest in only large-cap companies, which means you will be dealing with only the biggest companies in the world. Other equity funds choose to focus on small-cap companies, which have a higher potential for growth.

Risk vs. Reward

Investing in an equity fund does provide you with a certain amount of risk. You are essentially investing in the stock market, which carries with it an inherent risk. If several companies in the portfolio were to go bankrupt, it could cause you to lose money on your investment. With this in mind, you should know that equity funds also provide a great potential reward to investors. These types of funds can bring in larger returns than other types of mutual funds because of the large opportunity for growth.

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