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What is an 'Equity Fund'

An equity fund is a mutual fund that invests principally in stocks. It can be actively or passively (index fund) managed. Equity funds are also known as stock funds.

Stock mutual funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography.

BREAKING DOWN 'Equity Fund'

The size of an equity fund is determined by a market capitalization, while the investment style, reflected in the fund's stock holdings, is also used to categorize equity mutual funds.

Equity funds are also categorized by whether they are domestic (U.S.) or international. These can be broad market, regional or single-country funds.

Some specialty equity funds target business sectors, such as health care, commodities and real estate.

Ideal Investment Vehicle

In many ways, equity funds are ideal investment vehicles for investors that are not as well-versed in financial investing or do not possess a large amount of capital with which to invest. Equity funds are practical investments for most people.

The attributes that make equity funds most suitable for small individual investors are the reduction of risk resulting from a fund's portfolio diversification and the relatively small amount of capital required to acquire shares of an equity fund. A large amount of investment capital would be required for an individual investor to achieve a similar degree of risk reduction through diversification of a portfolio of direct stock holdings. Pooling small investors' capital allows an equity fund to diversify effectively without burdening each investor with large capital requirements.

The price of the equity fund is based on the fund's net asset value (NAV) less its liabilities. A more diversified fund means that there is less negative effect of an individual stock's adverse price movement on the overall portfolio and on the share price of the equity fund.

Equity funds are managed by experienced professional portfolio managers, and their past performance is a matter of public record. Transparency and reporting requirements for equity funds are heavily regulated by the federal government.

An Equity Fund for Everyone

Another great feature of equity funds is the sheer number of funds available. In the mutual fund arena as a whole, equity funds are the most popular type of mutual funds, and as of 2016, there were more than 9,500 mutual funds available in the market. Whether it’s a particular market sector (technology, financial, pharmaceutical), a specific stock exchange (such as the New York Stock Exchange or Nasdaq), foreign or domestic markets, income or growth stocks, high or low risk, or a specific interest group (political, religious, brand), there are equity funds of every type and characteristic available to match every risk profile and investment objective that investors may have.

Some equity funds are also divided into those pursuing income or capital appreciation or both. Income funds seek stocks that will pay dividends, usually investing in equities of blue-chip companies. Other equity funds primarily seek capital appreciation, or the objective that the stocks in the portfolio will go up in share price.

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