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Understanding the Basics of an Equity Fund

Have you read the disclaimer at the end of a mutual fund contract paper that says “Mutual funds are subject to market risks?” This type of mutual fund is known as an equity (or stock) fund. It actually invests your money into the stock market. The underlying assets determine the value of the mutual fund and the portfolio is managed entirely by the mutual fund company.  

Investments in equity funds can be done in any sector. There are many to chose from: energy, real estate, technology, healthcare, etc. The equity funds are further categorized on the basis of market capitalization, its investment category and investment strategy. The price of each equity fund is calculated as per net asset value (NAV). 

Why Invest in Equity funds?

The companies that sell equity funds want investors to buy more from shares in their fund. Therefore, they put a lot of effort in developing a portfolio that gives maximum returns to the investors. The best thing is that you can know the list of stocks that comprise the fund. You always can see where your money is going because the company has to provide a prospectus for you to read and study.  As a investor, you must always know and understand what you are investing in. 

In case you are an investor who is just getting started, you’ll be happy to know that buying an equity fund is a safer option than investing in individual stocks. This makes sense when you consider the following points:

1. There is Reduced Risk

The portfolio of investments that comprise the equity fund is an ideal mix of low risk and high-risk investments. Because your money is spread out over many different stocks, it dissolves the risk to the equity fund owner making it a more profitable channel to invest.

2. Small Initial Investment

Equity funds let you start investing for future at a bare minimum price too. Then, if you set up regular monthly payments into the fund, it helps take the guesswork out of when to invest. Just keep doing it consistently over time. So, that keeps your investment safe, helps it grow too and helps you sleep better at night. 

Related Content: The Ultimate Beginner’s Guide to Investing Money the Right Way

3. Market impact is less

As I hinted at briefly above, the impact of volatility in equity funds is less compared to holding individual stocks. Your risk is spread over the entire basket of stocks in the mutual fund. If one stock does poorly, the others help compensate or offset the performance of that stock. 

4. Lots of Options

Again, as I mentioned above, there are many types of equity funds for investors at all stages of life. You can find funds for various sectors of the market. You can find funds that are more aggressive than others. There are funds better suited for those nearing or in retirement. Review all your options before investing. Just because a fund is popular doesn’t mean it’s the right one for you. 

Disadvantages of Equity Fund

It cannot be all green, right? Equity funds have some drawbacks too, which are imperative for an individual to be aware of.

There is Still Risk

You are investing money in the stock market. So there is inherent risk of losing money with that. If you are needing your money in the short term, say 6-24 months, it would be better to park it in a money market fund or savings account at your local bank.

Related Content: What is a Savings Account and Does My Child Need One

Potentially No Index Comparison

Some mutual funds have no index (like the S&P 500 for example), which are major world indices that give a clear indication of how the market is performing. Understanding the ebb and flow of the market helps you find an entry and exit point. If you don’t have anything to compare a fund to, you may be less likely to gauge how it is performing against the world markets as a whole. 

Equity funds are generally developed by professional portfolio managers. They tend to be a secure channel of investment. But you must research thoroughly to see which type of equity fund performs well. Also, remember to make sure the investment has a solid track record of positive returns. And always invest in something you understand. 

Questions for Discussion: How did you get started investing? Did you use equity funds first or individual stocks? Do you pay attention to the major world indices or just the U.S stock market indices? 

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