Equity mutual funds are professionally managed mutual funds that invest in stocks, with the objective of long term growth through capital gains, rather than strictly dividends (although dividends have historically been responsible for a good share of the long-term return). Typically, mutual funds specializing in equities focus either on a group of stocks in a particular risk group, or in a particular business sector. They are usually further specified as a large-cap, mid-cap or small-cap portfolio.
The demarcation between large, mid and small-cap varies somewhat from one fund manager to another, but they are roughly considered to be companies capitalized at greater than $5 billion, down to less than $500 million, with mid-cap filling the range in between. When it comes to picking the stocks for their portfolio, equity fund managers may use a value approach, a growth approach or a blend of the two.
• In the value approach, they look for companies that are undervalued on the market for their actual worth. These stocks often will increase in value when purchased in sufficient quantity, simply because of the implication of optimism from the actual purchasing.
• In the growth approach, the fund manager will look for stocks of companies that are growing faster than their competitors, or than the market itself. Rapidly growing, established companies are prime targets.
• Some managers prefer to blend their approach, seeking stocks with both value and growth profiles, thus affording a little more protection to their portfolio.
Equity mutual funds are investments that are typically held for prolonged periods, unless a downswing is detected. They offer no particular tax exemption when profitable, but if carefully selected, they can render sizeable returns. As with nearly all investment opportunities, risk and return are in inverse proportions. That is to say that low-risk funds will offer a lower potential return than a high risk fund. Unless one is well versed in stock trading, and has the time to monitor the market very aggressively, it is nearly always advisable to use a professional fund manager.