If you're interested in putting your money into the stock market, and you're new to investing, you may want to consider investing in an equity fund.
An equity fund is a type of mutual fund made up of stocks, and it's a relatively simple way to invest in many stocks all at once, rather than purchasing stocks one at a time. So if you're thinking of investing in an equity fund, keep reading.
What Is an Equity Fund?
An equity fund is a type of mutual fund made up of many stocks—anywhere from a couple dozen to more than a thousand. People invest in equity funds, sometimes called stock funds, because while putting money into the stock market can be risky, an equity fund tends to dilute the risk. Instead of investing money in one company's stock, which could plummet or spike in value on any given day, you're investing in a lot of companies, which helps reduce risk.
Essentially, an equity fund works this way: When you put money into an equity fund, your money (along with anyone else's investing in the same equity fund) is used to buy stocks, often hundreds of them. It would require a lot of your capital and time to buy this many stocks on your own, but the very moment you invest in an equity fund, that's exactly what you've done: You have partial ownership in multiple companies.
If you're new to investing, you'll probably want to consider investing in a public equity fund as opposed to a private equity fund. Typically, a private equity fund involves investing in companies that are not traded in public markets, and it can take longer to see growth. While private equity funds can be profitable, because they may involve new businesses, they can be riskier investments and usually require substantial minimum investments.
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Pros and Cons of Equity Funds
When deciding whether to invest in public equity funds, you'll want to consider your personal investing goals and preferences. Your investing needs are unique, of course, but you can start by reviewing these pros and cons to get a better sense of whether equity fund investing is right for you.
Pros of Equity Funds
- They add diversification to your portfolio. In general, financial advisors often recommend following that old adage: Don't put all of your eggs in one basket. You aren't only investing in one company that could do well or badly; you're investing in a lot of companies and hoping that enough of them do well over time to earn a healthy profit.
- It isn't a do-it-yourself investment. Equity funds are actively managed by portfolio managers who are experts in this type of investing. They're a contrast to passively managed funds that are left to algorithms that follow the stock market.
- You have a lot of choice in what you invest in. For instance, you can choose to invest in U.S.-only equity funds, meaning only in companies listed on the U.S. stock exchange. If you're feeling good about the global market, you may instead prefer to invest in foreign equity funds that only invest in businesses listed on foreign stock exchanges. You might also be interested in investing based on market capitalization. For instance, large cap growth equity funds invest in companies that are worth $10 billion or more.
Cons of Equity Funds
- Equity funds come with fees. Investing often comes with fees attached. Fortunately, fees for equity funds have dropped over the years. Before you invest your money in an equity fund, read the fine print and see what the fee is. Typically, management fees for equity funds are 1.5% to 2%.
- Equity funds can lose value. Unlike a certificate of deposit or money in a high-yield savings account, an investor can lose money with an equity fund. But this is why it's generally advised to invest in equity funds only if you're comfortable with the risk of financial loss.
- You lack control in what investments are made. While you can decide you want to invest in a narrow group of stocks, such as a small cap growth equity fund or an equity fund specializing in technology or health care stocks, you can't actually pick the companies the fund will invest in. For some investors, not having to worry about those details is a plus.
How to Invest in Equity Funds
Actually investing in an equity fund is a pretty straightforward process. You'll want to do the following.
- Decide who you're buying the equity fund from. If you have a 401(k) plan through your employer or an individual retirement account (IRA), you likely have investment options that include equity funds. Otherwise, you can work with a financial advisor or invest through an online brokerage or robo-advisor.
- Answer the active versus passive question. You'll want to decide if you want an actively managed fund or a passively managed fund. Actively managed funds tend to have higher fees, while passively managed funds such as index funds follow a benchmark index and thus require less management, resulting in lower fees.
- Decide how much to invest. Some online brokerages will let you put in as little as $1 in an equity fund. (Of course, if that's all you invest, don't expect to earn much.)
The Bottom Line
If you're looking for a way to earn interest and build wealth over time, investing in an equity fund is one approach. For the person just starting to save and thinking about building wealth and saving for retirement, it can be a good way to begin investing in stocks.