Equity Funds
Chances are you have at least one long-term goal. Whether it's saving for retirement or college or starting your own business, equity funds may help you reach your financial goals.
- Types Of Equity Funds
- Investment Styles
- A Word About Risk
- Advantages Of Equity Funds
The mutual fund concept is simple: A number of people who share the same financial objective pool their money and have it invested and managed by professional portfolio managers. Equity funds invest this pooled money primarily in common stocks of public companies generally with long-term capital appreciation as a goal.
A fund' s risk and return depend on the types of companies it buys. The investor's risk and return are also affected by how long they keep their money invested in the fund. You stand the best chance of reaping the rewards of stocks if you keep your money invested for a long time.
Types of equity funds
One fund may invest in only the stocks of well-established companies while others concentrate their investments in companies in one specific industry. Some examples:
Growth funds. These funds invest in rapidly growing companies which tend to use their profits to finance future growth instead of paying them out as dividends.
Balanced funds. These funds invest in blue chip stocks-large, established companies with long histories of steady growth and reliable dividends. The income from the dividends can help reduce the fund' s volatility over the long term.
Sector funds. These funds concentrate their investments in a particular market sector or industry such as health care, communications or biotechnology. Because of their specific focus and lack of diversification, sector funds are generally best used as a complement to a well-diversified portfolio.
Global funds. The ability to invest anywhere in the world is the biggest advantage global equity funds offer because they have the greatest number of stocks to choose from. Investing globally, however may involve higher risks depending on market conditions, currency exchange rates and economic, social and political climates of the countries where the fund invests.
Investment styles
Another dimension for looking at an equity fund is whether it's following a value or growth style of investing. Both growth- and value-oriented investments can be important components of a diversified portfolio.
Value investing. Value managers tend to look for companies trading below their intrinsic value, but whose true worth they believe will eventually be recognised. These securities typically have low prices relative to earnings or book value, and often have a higher dividend yield. For example, these companies are found in out-of-favour industries.
Growth investing. Growth managers look for companies with above-average earnings growth and profits which they believe will be even more valuable in the future. They also look for companies that are well position to capitalize on long-term growth trends that may drive earnings higher. Because these companies tend to grow earnings at a fast pace, they typically have higher prices relative to earnings.
A word about risk
Stocks historically have outperformed other asset classes over the long term, but tend to fluctuate in value more dramatically over the short term. These and other risks are discussed in each fund' s prospectus.
Advantages of equity funds
Diversification. Equity mutual funds allow you to spread your money across a larger number of securities than you probably could on your own. This diversification dramatically reduces the risk of anyone company s losses adversely affecting your investment as a whole.
Professional management. Professional money managers closely monitor the securities markets and individual companies, buying and selling securities as they see opportunities arise. Few individual investors can devote time or resources to daily management of a sizable portfolio or stay up to date on the thousands of securities available in the financial markets.
Liquidity. You may sell some or all of your mutual fund shares at any time and receive their current value (net asset value). The value may be more or less than your original cost.
Convenience. Mutual funds offer shareholders many services that make investing easier. You may buy or sell shares each business day, automatically add to or withdraw from your account each month, and have income dividends and capital gains paid out to you or automatically reinvested.