Equity Mutual Fund, Equity Mutual Funds

By: EconomyWatch   Date: 31 July 2009

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An equity mutual fund is an investment vehicle for stock market investments. Thus, it is also called a stock mutual fund. Through this fund, investors can gain exposure to the profit opportunities in the stock market without getting personally involved in the market.  

Equity Mutual Fund: How Does it Work?

Equity mutual funds work in the following manner:

·        When a fund management firm floats a mutual fund, it decides on the fund’s investment objectives. For example, it might decide to invest in growth stocks to ensure long-term capital appreciation for investors or may opt for stocks that have a high dividend yield. This objective is specified at the time of floating the mutual fund.

·        The firm registers the mutual fund with the US Securities and Exchange Commission (SEC). With the registration, it agrees to follow rules related to fund management and the disclosure of information to shareholders.

·        Investors wishing to gain exposure to the stock market buy units in the fund. Most equity funds are "open-ended," which means there is no limit to the number of units that can be issued by the fund.

·        This pool of money is then used to create a large portfolio of stocks. This portfolio is actively managed by professionals to ensure high returns.

·        To cover their expenses and make profits, mutual funds charge two types of fees, operating and sales. Operating fees cover the fund’s expenses. The sales fees can either be just the purchase and/or redemption fees or include a "load" fee. This “load” fee is an up-front percentage of invested capital and can be as high as 8%. Most analysts recommend "no-load" mutual funds.

·        Investors can redeem their units as and when they wish.

 

Equity Mutual Fund: Benefits and Drawbacks

 

Equity mutual funds reduce the risks associated with the stock market through:

  • Professional management: Equity mutual funds are managed by a professional management team. This team thoroughly researches the companies and various factors that impact the stock market before investing and keeps modifying the portfolio in accordance with company news and the market and sector trends.

  • Diversified portfolio: Since the portfolio of a mutual fund is composed of stocks of several companies, you would not be dependent on the performance of a single company.

 

On the downside, equity mutual funds are exposed to economic downturn, which adversely affects the stock market trends.

 


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