The most common type of mutual fund is Equity Funds. Equity fund consist mainly of investment on stocks. And equities represent corporation ownership. You might wonder how this works, right? Companies raise capital by selling stocks of the corporation, and each share of stock represents a piece of the company. While most mutual funds invest in stocks, fund managers do not just buy stocks offered to them that they find attractive. That is why an equity fund holds numerous carefully chosen stocks. Stocks are selected by the fund manager because he or she believes that these investments works toward the achievement of a fund’s stated objective which can be a long-term growth, capital appreciation, total return, or the combination of the three. Fund manager can also combine the stocks with bonds to create an investment that offers both income and growth.

There are different types of investments in equity funds. Some funds specialize in investing in small-cap stocks, others in large-cap stocks while the rest prefer the mid-cap stocks. To avoid confusion for beginners on this field, “cap” is shorthand for capitalization. It is one way of measuring the size of a company, on how well it is capitalized. Newer and up-coming firms that are worth several hundred dollars are called small-cap stocks. The large-cap stocks on the other hand are those best known companies that have market caps of billion dollars. The Mid-caps are those somewhere in between these two types of cap. But how big a large-cap is, you might ask. Even though there are many different formulas on how the three are categorized, here is a guideline for you: large-cap stock is greater than 5 billion dollar, Mid-cap stock is $500 million to $5 billion and the Small-cap stocks are less that $500 million.

One of the three styles of stockpiling is used by equity fund managers whenever they make investment decisions for their portfolios. There are two types of approach to stocks: value approach and the other one, growth approach. Value approach is searching for stocks that are undervalued in comparison to similar companies. The shares prices of these stocks are often have been beaten down by the market as some investors became pessimistic about the potential of these corporations. The other approach is done by looking primarily at growth: picking stocks that are growing rapidly than their competitors. Equity fund managers buy stocks in well-established companies that are rapidly growing. Sometimes, fund managers buy both kinds of stocks. This approach in building a portfolio of both growth and value stocks is called blend approach.

Another question that has been popping on your mind that we will answer is risk. Although equities are known historically as long-term performers, they also have their share of price volatility than cash equivalents and bonds. Equity stocks may offer some degree of diversification because of their ability to hold many different stocks but they come in with risk. Equity stocks can be volatile because the prices move substantially on daily basis, higher or lower.

But despite the risk, it still may fit into your financial plan. You can minimize the risk by combining equity funds along with lower risk investments as part of an investor’s long-term financial plan.