What Is an Equity Fund?

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.

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.

Pros and Cons of Equity Funds

Pros of Equity Funds

• Diversification: Equity funds add diversification to your portfolio. 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.
• Professional Management: 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.
• Variety of Choices: You have a lot of choice in what you invest in. For instance, you can choose to invest in U.S.-only equity funds, foreign equity funds, or funds based on market capitalization.

Cons of Equity Funds

• Fees: Investing often comes with fees attached. Fortunately, fees for equity funds have dropped over the years. Typically, management fees for equity funds are 1.5% to 2%.
• Risk of Loss: Unlike a certificate of deposit or money in a high-yield savings account, an investor can lose money with an equity fund. It’s generally advised to invest in equity funds only if you’re comfortable with the risk of financial loss.
• Lack of Control: While you can decide you want to invest in a narrow group of 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:

1. 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.
2. 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.
3. 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.

At O1ne Mortgage, we understand the importance of making smart financial decisions. If you have any mortgage service needs or questions about investing, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey with confidence.