What is an equity mutual fund?

An equity mutual fund is a professionally managed, pooled investment vehicle comprised primarily of stocks.  Depending on the strategy employed by the mutual fund, it may own stocks issued by companies around the world or it may limit its investable universe to companies within the United States. The strategies and investable universes for equity mutual funds are determined by the fund’s management team, which may take an active or passive (index-based) approach to investing. These mutual funds can be varied in their approach with some allowing companies of all styles and sizes, while others might limit their holdings based on particular characteristics of a company. With so many variables, the number of stocks held within an equity mutual fund can range from under 20 stocks to over a thousand.

Why have an equity mutual fund in your portfolio?

Investing in equity mutual funds allows you to gain exposure to a broad range of companies rather than holding a single stock. This diversification may help reduce the risk that might be associated with holding a specific stock. Additionally, equity mutual funds allow investors to access specific markets or styles to build more complete portfolios to help achieve an investor's goals.

What are some types of equity mutual funds?

  • Domestic

    Domestic equity mutual funds own stocks in companies based in the United States.

  • International

    International equity mutual funds own stocks in companies based outside of the United States.

  • Market-Cap

    These equity mutual funds own stocks in companies that are similar in the size of each company's market capitalization – the total value of its shares. Most commonly, large, mid, or small capitalization companies.

  • Style

    Equity mutual funds that own stocks in companies that have similar attributes. Common examples include: companies with value or growth attributes.

  • Socially responsible

    Socially responsible equity mutual funds own stocks in companies that align on noneconomic principles, such as environmental, social, and corporate governance factors.

  • Sector

    Sector equity mutual funds own stocks in companies pursuing similar types of businesses or offering similar products and services.

What are the pros and cons of equity mutual funds?

  • Pros

    Portfolio diversification
    Equity mutual funds are not concentrated in a single stock position, enabling investors to reduce concentration risk.

    Professionally managed
    Mutual funds are managed by professionals, who conduct investment research and take many of the potentially difficult and numerous daily decisions out of an investor’s hands.

    Breadth of product
    Equity mutual funds are one of the most common types of mutual funds available. As such, there are many different types and options available. Investors are more likely to find a product that meets their specific portfolio needs.

  • Cons

    Impact of outside influence
    When outside influences (culture, government, economy, resources, etc.) experience a shift, that shift can have a negative impact on all of the businesses within the market. This may result in increased volatility for the mutual fund.

    Minimal customization
    Investors are unable to customize equity mutual fund portfolios to meet their specific needs by including or excluding certain securities. These decisions are made solely by the management teams.
     

What are other factors to consider when choosing an equity mutual fund?

  • Geography

    Is the fund limited to holding only U.S. stocks or does it provide exposure to companies domiciled elsewhere around the world?

  • Turnover

    Does the fund use a strategy that entails stocks of companies being traded frequently?

  • Concentration

    How many different company stocks are held within the portfolio? Does the mutual fund limit holdings to certain sectors?

Next steps

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