Wednesday, March 7, 2012

Types of Mutual Funds – Equity Funds

Types of Mutual Funds – Equity Funds.

1. What is an equity fund?

An equity fund is a mutual fund that invests primarily in stocks. Stocks are high risk investments, therefore equity funds carry a relatively higher risk. However, there is also a possibility of a higher return than other types of funds.

2. What are the advantages of investing in equity funds?

Diversification: An equity fund invests in multiple stocks and the fund manager creates and manages a well diversified stock portfolio. By investing in an equity fund, you will receive the benefits of this diversification. If one stock in the fund goes down, another may go up - this is how diversification reduces the overall risk of a portfolio.

Liquidity: Equity funds can be sold and converted to cash easily.

Professional Management: Equity funds are managed by professionals who analyze various aspects of a stock prior to making an investment. Investors in equity funds automatically receive this benefit of professional stock picking.

3. Are there risks involved in equity fund investing?

Yes. As with any investment, there are risks involved in investing in equity funds. Stocks are high risk investments and therefore equity funds carry a high risk of price changes of underlying stocks. The reason to invest in equity funds is because there is also a possibility of stock prices rising in which case investors can make handsome profits.

4. What are the different types of equity funds?

Growth Funds: These funds are meant for investors who are looking to grow their capital at a rate higher than other investments like deposits and who have a longer time horizon. These funds invest in companies that have high growth potential. Since high growth companies could also be newer and more riskier, these funds are higher risk investments.

Sectoral Funds: These funds will focus on companies in a specific sector like energy, technology etc. These funds carry a risk since they have zero sector diversification; they place all their eggs in one basket/sector. These funds are normally preferred by investors who are interested in specific sectors and are looking to diversify among companies in the same sector.

Liquid Funds: These funds invest in dividend stocks. They are meant for investors who have a lumpsum to invest and are looking to have a steady flow of income from the investment.

Fund by size: These funds invest in companies of a certain size, eg. small cap, medium cap, large cap etc. Investments are typically made in different sectors, but in companies of a certain size.

Index Funds: These funds invest in the same stocks and in the same ratio as the underlying index. These funds are considered a relatively safe bet amongst the more riskier equity funds.

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