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Tags: finance, stock mutual funds, types of equity funds
 In our last two articles we not only talked about the different types of mutual funds (see “Knowing the Different Types of Mutual Funds” - 4/27) but we also broke down the costs associated with them (see “Breaking Down the Mutual Fund Cost” – 4/28). As a continuation this article we will be discussing one of the mutual fund types known as the stock or equity funds.
As a refresher, stock or equity accounts are mutual accounts that invest primarily in the common stocks or equities of corporations. They are typically considered riskier than the other types—bonds or money market accounts. However, even with the higher level of risk, there is also a higher potential for greater returns.
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Historically, equities have outperformed both bonds and money market investments over a longer period of time—when corporate stocks do well, so do the stock accounts. There are different types of these investment accounts depending upon their investment objectives, policies, strategies, and style of management, and we will discuss each type in turn.
The first type is the Growth Equity Funds. They usually invest in more proven, larger expansion-oriented corporate stocks that have a greater potential for long term capital gains. They look for corporations that have significant earnings or revenue increases, typically disregarding those that pay out dividends. If these rapidly growing companies continue to increase their value, the fund will reap the benefits of large capital gains once they sell the stock at the higher market value.
Such accounts are usually more volatile than other types. They tend to rise more in bull markets but fall much lower in bear markets. The second type is the Aggressive Growth Equity Funds. These accounts focus in on capital appreciation rather than on income generation. They look for companies that are experiencing very rapid earnings or revenue development but unlike their regular growth counterpart, they tend to trade more frequently and take more risks by investing in smaller companies, newer industries, or start-up companies.
They also hold a smaller range of company stocks in their portfolios and are more speculative in nature. The third type is what’s called the Value or Income Equity Funds. They invest in companies that have low P/E ratios—stocks of larger, stable and mature companies that have stopped growing, have long histories of sizable dividends and that use their earnings to pay these dividends providing you the ability to receive some income.
Since they focus more on income generation, they are more conservative and thus less volatile. If you are looking for capital gains potential as well as income generation then the fourth type, the Blended or Growth and Income Equity Funds, just may be what the doctor ordered. A mix of the income and growth types, they invest in both value and expansion stocks so that you can enjoy current income and long-term capital appreciation within the same account.
They typically invest in companies that show positive increases and dividend income rates in the future, as well as provide you with good dividend income today. The risks tend to be moderate because of the balance between the growth and income factors. They are somewhat more risky than value accounts and somewhat less risky than growth ones.
Other types of equity funds can be categorized according to the market capitalization or value of the companies in their portfolios. The three main types of cap equity funds are large-cap, mid-cap, and small-cap. The smaller the average market capitalization of the fund's holdings, the more volatile it is. As with any investment, equity funds are also open to various investment risks.
The value of the company’s stocks in the portfolio and external factors may affect the performance of the equity funds. Get as much information before starting out.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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