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How do equity funds work?

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By : Swarali Chavan    99 or more times read
Submitted 2019-03-13 17:54:14
What is equity fund?

An equity fund is a mutual fund scheme which is invested predominantly in shares/stocks of companies. They are also known as growth funds. Equity funds are either passive or active. In an active fund, the fund manager will scan the market, conduct research on companies, examine performances and look for the best stocks to invest. In a passive fund, the fund manager builds a portfolio which mirrors a popular market index. Equity funds can be divided as per market capitalization, i.e. how much the capital market values an entire company’s equity. There can be large cap, mid cap, small or micro-cap funds. There can be further classification as diversified or sectoral/thematic. In the former, the scheme invests in stocks across the entire market. In equity funds, when the investor invests in a mutual fund, the funds are invested inequity stocks on the investor’s behalf where the gains and losses will be in the investors name. There is a wide range of equity funds that are classified by their investment objective that needs to be mapped to the risk profile. Though the investment objective of equity funds is capital appreciation since it is the risk taken to achieve the objective which varies. This will further depend on the type of stocks which the fund would invest in.

Once an investor clearly understands equity fund meaning, they can start investing in them instantly. One of the greatest benefits of equity funds is the instant diversification, it is also easier and less expensive to invest in equity funds than to buy each and every stock in a fund’s portfolio. Equity funds are cheaper, they are a way to avoid the often high transaction costs and low liquidity that are associated with trading individual stocks. It is sometimes easier to sell fund shares that to sell a particular stock, if that stock has some unusual characteristics like if the issuer has a low credit rating or issuer is facing some difficulty. Through equity funds the investors get the services of a professional who will watch and act on the market on behalf of the investor, and also handles the trading, decisions and handles the asset allocation.

Equity mutual fund schemes pool the investors funds and invest in equity stocks after in-depth research. It is essential to understand what is equity fund. This includes knowing the objective of the equity fund and mapping it to the investors risk profile. The next step is asset allocation of the fund that is followed by investment strategy. The investor should also know the expense ratio since it can impact the returns.
Author Resource:- Swarali Chavan is a finance professor. In her free time, she reads upon and studies about market investment instruments. She has spent considerable time researching onequity funds. In this article, she has explained how an equity fund works.
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