The basics of equity funds: How they work and why they matter

Equity funds allow individual investors to own a diversified portfolio of many companies by purchasing shares in a fund managed by professionals. They offer an easy way to build wealth over the long run. 

Understanding equity funds

Equity funds are mutual funds or exchange-traded funds (ETFs) that invest primarily in stocks. They allow individual investors to own a diversified portfolio of many companies by purchasing fund shares. Equity mutual funds are professionally managed and aim to grow investor money over the long run through stock price appreciation and dividend distributions. By holding stocks of various industries and company sizes, equity funds can help reduce risk compared to investing in individual stocks. The value of equity fund shares depends on how the overall stock market and the funds’ stock holdings perform. 

Equity funds: How they work

• Investors put money into an equity mutual fund or ETF. This pools their money with other investors.
• Fund managers use the pooled money to purchase a variety of stocks according to the fund’s investment objective. Objectives may focus on large companies, small companies, growth stocks, value stocks, or a mix. 
• As the stocks held by the fund gain or lose value, so does the fund. The fund regularly sells stocks that have appreciated and buys more of those that remain undervalued.
• Investors own shares of the equity fund, not the individual stocks. Fund shares fluctuate in value along with the total worth of the underlying stocks held. 
• When stock prices rise overall, the value of the fund shares tends to rise as well, and investors may earn money from price appreciation or dividends paid by the stocks.
• Investors can redeem (sell back) their fund shares at any time to get the current market value of their investment.

Why equity funds matter

The following table outlines some of the key features that equity funds provide to investors.

Feature	Description
Professional Management	Equity funds are managed by professionals who research companies and select stocks based on the fund’s objective.
Diversification	By investing in many stocks across different industries and market segments, equity funds provide built-in diversification for investors.
Low Cost	As costs are split among many investors, equity funds typically have lower fees than buying stocks individually.
Liquidity	Investors can easily buy and sell their shares throughout the trading day unlike having to find a buyer individually for each stock holding.
Accessibility	With just a few hundred dollars, equity funds allow investors to build a portfolio containing stocks of many large, mid-sized, and small companies.

 

Conclusion

Equity funds allow people to build wealth over the long term through professional stock selection and diversification. The low costs and easy access make equity funds, including best mutual funds, a simple way for anyone to invest in the stock market. Whether putting in money each month or choosing from different investment styles, equity funds are a powerful tool to help meet financial goals.