Equity FundsMutual Funds
A large percentage of individual investors already own or will buy equity based mutual funds. These funds invest almost completely in equities, but also invest, by requirement, in other instruments. Their redemption fund will be made up of cash and cash equivalent instruments, sometimes ultra-short term debts. But apart from their redemption fund, they own almost purely equities. If the fund is allowed to invest outside of its main classification, their prospectus will notify you of that privilege. You will also see it represented in the list of investments released in the fund’s annual informational documentation. Equity funds come in a wide variety of specializations and classifications. Some of these funds are divided based on locations they invest in, while others are divided based on their specifications.
General Equity Funds invest in equities across multiple industries and sectors in the markets. General funds divide among the three types of equity: growth equities, value equities, and income equities. These funds are categorized by their orientation towards growth, value, income, or a mix of these equity types. They are then ranked by their capitalization. Large capitalization funds specialize in large firms which are stable and have almost maximized their growth potential. Mid-capitalization funds specialize in firms that are less stable but have substantially more growth potential. Small capitalization funds specialize in highly risky young firms that have lots of room to grow.
Growth Equity Funds invest in growth equities. These shares have high potential for rapid capital appreciation. These funds focus on shares growing via revenue increases and reinvestment resulting in capital gains. This contains higher growth, but higher risk. A lot of things can go wrong when attempting to rapidly grow a company.
Value Equity Funds focus on equities selling at discounts to their intrinsic value. They purchase shares below or close to intrinsic value, believing these shares are positioned to rapidly increase if the market realizes their true worth. These funds repeatedly attempt to capture value from mispriced securities. They also reduce risk by purchasing shares that are unlikely to collapse in price, since they are already below intrinsic value.
Income Equity Funds attempt to capture value by developing a portfolio based on cash payments. These funds focus on bonds paying steady interest payments and equities delivering high dividends. Fund managers will reinvest these earnings back into the fund, purchasing more stable firms which increase delivered income. They also send some of these dividends back to investors in the fund.
Index Equity Funds track a specific benchmark or index. They typically hold hundreds of firms that are directly related to the benchmark target. These are passive funds that don’t actively trade equity shares unless they are added or dropped from the target of emulation. If equities are already inside the index, they are purchased in equal proportion. If they are being added, they are added in the same proportion. They attempt to precisely track the index’s results.
Sector Equity Funds select a specific industry and invest heavily in equities (and bonds if a mixed fund) from that sector. Sector funds focus only on those investments. The management team should be very experienced with this industry or sector, and have knowledge of it inside and out. This will help to relieve some of the pressure created by the lack of investment diversification.
Domestic, Foreign, or Global Funds
Domestic Equity Funds are based in your home market. They specialize in domestic investments. Funds that only invest in nations or markets beyond your borders are labeled international or foreign funds. World or global funds invest anywhere in the world, domestic or foreign. Selecting funds which specifically target differing regions can help diversification. They may not completely eliminate overlaps, since large and mega corporations operate internationally, and sometimes have shares on foreign markets.
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