Money 101  >  Explainers

What are equity funds?

POSTED ON July 01, 2019

People who want to make money invest in stocks. Successful people have others do it for them. How? Through equity funds.

So, what are equities? Equities are stocks, which are the "little bits" of a company. They're also called shares.

Having equities in a company makes you part-owner. If it does well, the company's equities become more valuable. When this happens, you can sell the equities for a profit.

A fund, as you might know, is an investment "vehicle." People invest their money in the fund and a fund manager uses it to buy equities.

But this means having to pick a company. You'll have to put time in researching and studying how likely it is to succeed. What happens if the company doesn't do well? The value goes down.

Equities vs equity funds

When you invest in equity funds, you pass on the work of buying and selling the equities to someone else. (For a fee, of course.)

This way, you get to invest in several different equities than one or a few. This means if some equities are not doing well, others could be doing better. So it evens out. You call this being "diversified."

You get a say in what kind of equities the fund manager will invest in. Many banks and companies offer equity funds based on a certain theme.

They differ in whether the companies are small, medium, or large. How "big" a company depends on the total worth of all equities in the market. The bigger the company, the more stable it tends to be. (To be specific, they're divided into small-cap, mid-cap, and large-cap.)

In some funds, the companies give people with equities a part of their earnings. You call these dividends.

Others have lower fees compared to others because the fund manager doesn't do much with it. You call these funds that are passively managed.

Their opposite of this would be funds that are actively managed. In these, the fund manager is trying to outdo funds that are invested in the 30 most stable companies. It could work, but it can also be more risky.