An equity fund is as the name suggests, a fund that primarily invests in shares/stocks. You can never know in advance what returns you will get when you invest in an equity fund, but historically, stocks have been the best performing asset class when investing in the long term.
By Viktor, co-founder of Bifrost - Mar 04 2019
Because of this high performance, equity funds are associated with high risk (since stocks are risky), but since shares show a good historical return, there is still a good reason to have equity funds as part of long-term of a long-term portfolio.
What types of equity funds are there?
There are lots of different types of equity funds, and both investment focus and risk level can differ a lot. Equity funds usually have some form of explicit focus or strategy when they invest. The different focus and approach used, are often reflected in fund’s fees, also called management fee. A more actively managed fund with a more complex strategy will in general result in higher fees, but this is not always the case.
Two common directions of the focus and strategy are geographical areas (e.g. UK, Europe, North America) and industries (e.g. real estate, technology, pharmaceuticals). But there are several other types of orientations and strategies, so it is important to read what applies to the specific fund that you are interested in.
The majority of all index funds are equity funds, which then follow a specific index to create an equivalent total return. Read the blog post about Index funds for more information!
Should one only have equity funds in the portfolio?
A long-term investor who does not need the money for at least five years (preferably longer) can advantageously have equity funds in their portfolio, this because the stock market tends to always move upwards in the long run.
However, it can be shaky from time to time, and therefore it is not a good idea to only have equity funds if you do not like to take too much risk. You can choose yourself the level of equity funds that you are comfortable to have in your portfolio. Some investors, for example, split their portfolio in equity funds and fixed income funds to lower the overall risk.
Important things to consider with a stock fund
When you choose to save money in an equity fund, it is important that it is money that you can "live without." You should of course not expect your investment to lose a large part of its value, but the idea is that the money you invest should be money you can live without in your everyday life. This way you will be able to spend time in the market increasing your chances of a higher return.
You should also take a look at the fund's fee (management fee) to see how high it is and compare it with other similar funds to get an idea of whether it is a reasonable level. The fee should, of course, be as low as possible, but sometimes it can be justified with a higher fee. The best way to find out if you’re paying to much or not is merely to compare the fund to similar funds.