As the most common form of mutual or group
managed, investment fund, equity funds allow investors to invest in
a pool of stocks. Investment managers determine the allocation of
equities within the fund based upon research, the stated allocation
guidelines of the fund and changing market conditions.
In general, equity funds are categorized
according to either their investment criterion or their target
stocks. The most general categories of funds range from small cap
(defined as firms with lower market valuations) to large cap funds.
There are also specific funds which take a balanced approach with a mixture of companies that fit more generally quantitative
requirements such as book value relative to price and earnings
ratios, along with industry-specific funds to facilitate investments
in individual verticals.
Another common form of equity fund is index
funds which allow investors to purchase access to a broad basket of
funds. These funds allocate investment funds to mirror the relative
values of a set of stocks on a specific index, such as the Dow Jones
Industrial Index, the NASDAQ Market, the NYSE or one of the many
specialized indices which track investments today.
Many investors favor index funds since they
broaden diversification and lower management fees, since they only
require calibrated re-adjustment rather than active management. Making an informed portfolio allocation decision requires
investors to understand the individual strategy, goals and
regulations that cover equity investments.
A Brief History of Equity Funds
Today, equity funds are a common investment
vehicle utilized by individual and institutional investors alike.
Designed to allow individual investors access to the trading and
allocation expertise of professional investors, modern mutual funds
gained prominence in the wake of the Great Depression. Individual
investors sought more guidance and transparency into investment
precisions, and the Securities Exchange Act of 1934 helped to ensure
mutual funds were regulated to safeguard investors. While broadening
the diversity of investments, equity funds allowed individual
investors to properly risk-adjust their portfolios without requiring
large individual stock holdings.
The funds continued to grow in prominence over
the decades, as new innovations such as specialized industry funds,
index funds and international market funds gained prominence.
Leading investment companies offered open contribution equity funds
for individual investors to contribute 401(k) and IRA retirement
funds in order to broaden their investment basis. Registered funds
are required to report historical results, quarterly portfolio
allocation decisions and management fees to the SEC (Securities and
Exchange Commission) to help investors make informed investment
How Different Types of Equity Funds Work in
Broadly defined, specific equity funds are
categorized according to the size of companies targeted their
investment strategy and the specific criterion which inform
investment decisions. According to investor's individual goals, one
can find equity funds which focus on growth, income, stock value and
specific markets or verticals. Finding the right balance of equity
funds relative to one's long run investment goals can help
individuals broaden the base of individual portfolios.
Growth funds organize investments into stocks
based upon the promise of increased future earnings, which, in turn,
will increase future stock prices. Based upon a combination of
market research, trends and speculation growth funds often focus on
technology companies, firms in emerging markets and smaller firms
with expansion goals.
By contrast, a value fund focuses on
established companies trading at a discount to their projected
future book value - by identifying companies believed to be trading
at a discount, firms can benefit from potential increases in future
stock prices. Another specialized form of value fund is an income
fund which aims to help investors benefit from companies which
return value to stockholders in the form of dividends or stock