A Business Encyclopedia

Equity Funds

Definition: The Equity Funds are the mutual funds that predominantly invest in stocks. The purchase of each share of stock represents the unit of ownership in the company.

With the purchase of every unit of share of stock, the investor becomes the owner of the company and enjoy the profits in any of the following forms:

  • An increased share value
  • Dividends

In case the company runs in losses or fails, then the shareholders might lose the entire value of his shares and receives no dividends. But however, the shareholders are not liable for any debts of the company.

Equity Funds are of following types:

Equity Funds

  1. Growth Funds: The growth funds invests in the stock of those companies that are growing rapidly. These companies invest all or most of the profits so generated into the research and development activities rather than paying these in the form of dividends to the shareholders. The objective of the growth funds is to provide long-term capital appreciation to the investor. Thus, these funds are concerned with generating capital gains rather than the income. These are best for the long-term investors.
  2. Aggressive Funds: Like growth funds, the aggressive funds also seek maximum capital appreciation and is meant for the investors who have an aggressive risk appetite. These funds invest in the companies that have high growth potential and is often accompanied by high share price volatility. The aggressive funds seek to achieve supernormal returns by investing in the startups, IPOs, and speculative shares. These funds have a strong positive correlation with the stock market, i.e. they perform well when the economy is doing well and fails with economic downturns.
  3. Income Funds: The income funds invest in the stock of those companies that regularly pay the dividends. These funds seek to maximize the current income rather than capital appreciation. These funds hold a variety of government, municipal debt obligations, money market instruments and other dividend paying stocks. The share prices are not fixed as these vary with the change in the interest rates, such as the price increases with the decrease in the interest rates and vice versa. The income funds are suitable for those investors who seek current income.
  4. Balanced Fund: These funds are the blend of growth funds and income funds. These invest in shares for capital appreciation and at the same time invests in the bonds to earn income. The balanced fund invests in those companies which are well established and offers the potential for capital appreciation along with the regular dividend payments. These funds are suitable for less risk-taking investors.

Thus, there are several equity funds that trade in the market, and each has unique characteristics, often indistinguishable, but however, all have the same objective to earn income and achieve the long-term growth through capital gains.

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