Equity fund
 

An equity fund is a fund that has invested a minimum of 80% of the capital in stocks. As an owner of an equity fund, you buy a unit in this fund. The fund then spreads the total capital from all the investors into many different equity positions. The choice of the fund's equity positions is made on the basis of who manages the fund, which sectors it will trade stocks in, which countries it will trade stocks in, and other regulatory rules the fund operates according to. You will find information about this if you read the equity funds investor-related papers.

As a rule, funds thus have a name that corresponds to which sector, country, or industry the fund is to invest in. Examples can be:

  • BGF World Energy

  • Vanguard Global Equity Fund

  • Fidelity Global Technology Fund

Types of equity funds

Equity funds are in most cases actively managed or created in so-called index funds.

Actively managed funds have an active fund manager who, through their own opinions and assessments, chooses the composition of securities which the fund shall hold. Such funds often have a slightly higher management fee than index funds. The goal of an actively managed fund is to create more returns in relation to the fund's benchmark index. As an investor of such funds, you are looking for funds that you think can do better than the stock market in general, or just provide a return that is not correlated with the indices. You should therefore believe that the fund manager can do a good job, you may want to check his historical return and investment profile before making an investment.

Passively managed funds also called an index fund, attempt to copy the general development of the fund's benchmark index without it having an active follow-up of a manager. Such funds are often managed by machines, which corresponds with lower management fees than actively managed funds. The risk of the fund follows the general risk in the stock markets over time. You simply get a fund that follows developments similar to the market in which the index fund operates. Let's say you buy an index fund with a passive portfolio from the American region, as an investor you can then expect to receive the same returns and fluctuations as the stock exchanges operating in the American region.

Exchange-traded funds, also called ETFs (Exchange Traded Fund), are closely related to index funds. In ordinary equity funds (mutual funds), you trade fund units directly from the fund owners themselves. This means that the trade takes a few days to complete. Since an ETF is listed on the stock exchange, it can be bought in real-time on the stock exchange in the same way as with stocks. This allows you to quickly buy and sell your units in the fund. ETFs like other funds require a management fee, but in many cases, they have a systematic investment strategy and thus have an average lower fee than actively managed funds. There are far more ETFs than mutual funds. Usually, you have specific ETFs constructed for specific markets and investment strategies. This provides investors with a wide range of opportunities.

 

Distinctions of the types

As you can see, customers in actively managed funds pay significantly higher management fees than index funds and ETFs. Research on fund management in international markets has shown that the cost advantage of index funds is greater than the extra return that some actively managed funds achieve. Index funds have therefore been the easiest way for an investor to get affordable and good exposure to the stock market that has delivered extremely good returns over the past 20 years.

This is another reason why large well-known investors such as  Warren Buffet have officially been recommending that the vast majority of investors should go for investments in global index funds. Investing in index funds has been proven to give a good return historically if you want to have long-term exposure to the stock markets.

However, actively managed funds can provide better returns in shorter time aspects, and in certain sectors. If you as an investor have done your analysis and have the impression that you have more information than what the rest of the market is sitting on, investments in such funds can give very good returns. If you also have confidence in the relevant fund manager's ability to generate extra returns, such decisions can be lucrative.