Meaning of Equity Mutual Fund.
Meaning of Equity Mutual Fund.
The Definition: What Is an Equity Fund?
An equity fund is a type of mutual fund or private investment fund, such as a hedge fund, that buys ownership in businesses (hence the term “equity”) most often in the form of publicly traded common stock. Other times, the ownership is the form of so-called private equity, which is when the equity fund invests in privately held companies that aren’t traded on the stock market.
The common denominator with an equity fund is the desire for fund management to find good opportunities to invest in businesses that will grow, throwing off ever-increasing gushers of profit for the owners, as opposed to a bond fund or fixed income fund, which uses shareholder money to make loans to companies or governments, collecting interest income.
What Are the Different Types of Equity Funds?
To go one step further than answering “What is an equity fund?”, we need to look at the different types of equity funds currently available to investors.
For sake of clarity, let’s break equity funds down into a handful of the categories you are most likely to encounter throughout your investment journey.
Equity Funds Focused on Geographic Mandate
•International Equity Funds are those that invest in stocks outside of the United States.
•Global Equity Funds are those that invest in stocks around the world including those in the United States but tend to favor foreign stocks by at least 80% of their overall portfolio weighting.
•Worldwide Equity Funds are those that invest in stocks around the world with no distinction between domestic or international assets, following wherever the portfolio managers or methodology dictate.
•Domestic Equity Funds are those that invest in stocks solely in the home country of the investor and issuer. For most readers, this will be the United States.
Equity Funds Focused on Market Capitalization
•Mega Cap Equity Funds are those that invest in stocks of the biggest companies in the world; behemoths worth hundreds of billions of dollars like Walmart or Berkshire Hathaway.
•Large Cap Equity Funds are those that invest in companies with a large market capitalization.
•Mid Cap Equity Funds are those that invest in companies with a medium market capitalization.
•Small Cap Equity Funds are those that invest in companies with a small market capitalization.
•Micro-Cap Equity Funds are those that invest in tiny publicly traded companies worth a few million, or few tens of millions of dollars, in market capitalization.
Equity Funds Focused on Investing Style
•Private Equity Funds are those that invest in privately held companies that don’t trade on the stock market. They may set up a limited liability company, infuse millions, or even billions, of dollars into it, raise money by issuing bonds, and then acquire businesses management believes it can improve.
•Equity Income Funds are those that invest in ownership of businesses that pay a significant dividend, often measured by a history of dividend increases, absolute and relative dividend yield, and conservative dividend coverage ratios.
•Dividend Growth Funds are those that invest in ownership of businesses with a record of increasing dividends per share at a much faster rate than the stock market as a whole. There are many different ways to make money with a dividend growth strategy, they sometimes beat their higher-yielding counterparts, and, in many cases, can make wonderful buy-and-hold investments.
•Index Equity Funds are those that mimic an index such as the Dow Jones Industrial Average or the S&P 500. Though not always true, index equity funds tend to have some of the lowest mutual fund expense ratios.
•Sector or Industry Specific Equity Funds are those that track specific areas of the economy, such as industries or sectors; e.g., discount retailers or property and casualty insurance groups. This can be appealing for those who want to invest their money in certain types of businesses, which may not be a bad idea given that certain industries have disproportionately produced high returns for owners.
In addition, equity funds can be bought as both traditional mutual funds and as exchange-traded funds, or ETFs. Some investors tend to favor one type over the other but there are advantages and disadvantages to both depending upon how the mutual fund is structured and the investor’s goals, objectives, preferences, and circumstances
