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 decisions today.
How Different Types of Equity Funds Work in Modern Markets
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 buyback plans.