An equity fund is a type of mutual fund that invests shareholder money in ownership of publicly traded businesses by buying common stock. There are countless types of equity funds. Jeffrey Coolidge / The Image Bank / Getty Images

One of the more popular questions I see from new investors is, What is an equity fund ?. Though the answer might be simple, it is only a starting point on your journey because once you understand what equity funds are, you still have to sort through the more than 10,000 publicly traded options to find the best fit for your family’s investment portfolio.

The Definition: What Is an Equity Fund?

An equity fund is a type of mutual fund or private investment fund that buys ownership in businesses (hence the term: equity). Many times, this ownership is in the form of publicly traded common stocks in well-known companies such as Coca-Cola or ExxonMobil. Other times, the ownership is the form of so-called private equity, which is when the equity fund invests in privately held companies that aren’t traded on the stock market.

The common denominator with an equity fund is the desire for fund management to find good opportunities to invest in businesses that will grow, throwing off ever-increasing gushers of profit for the owners, as opposed to a bond fund or fixed income fund, which uses shareholder money to make loans to companies or governments, collecting interest income.

What Are the Different Types of Equity Funds?

To go one step further than answering What is an equity fund?, we need to look at the different types of equity funds currently available to investors. The most popular include:

• International Equity Funds are those that invest in stocks outside of the United States

• Global Equity Funds are those that invest in stocks around the world including those in the United States
• Mega Cap Equity Funds are those that invest in stocks of the biggest companies in the world; behemoths worth hundreds of billions of dollars like Walmart or Berkshire Hathaway
• Large Cap Equity Funds are those that invest in companies with a large market capitalization
• Mid Cap Equity Funds are those that invest in companies with a medium market capitalization
• Small Cap Equity Funds are those that invest in companies with a small market capitalization
• Micro Cap Equity Funds are those that invest in tiny publicly traded companies worth a few million, or few tens of millions of dollars, in market capitalization
• Private Equity Funds are those that invest in privately held companies that don’t trade on the stock market.
• Equity Income Funds are those that invest in ownership in businesses that pay a significant dividend. often measured by a history of dividend increases, absolute and relative dividend yield. and conservative dividend coverage ratios.
• Index Equity Funds are those that mimic an index such as the Dow Jones Industrial Average or the S&P 500
• Sector or Industry Specific Equity Funds are those that track specific areas of the economy, such as discount retailers or property and casualty insurance groups.

In addition, equity funds can be bought as both traditional mutual funds and as exchange traded funds, or ETFs `.

Ways You Can Invest in Equity Funds

When you decide that investing in an equity fund is the route you want to take, you have several options that might make sense. You can:

• Invest by opening an account directly with a mutual fund management company such as Vanguard or Fidelity
• Invest by buying shares of an equity mutual fund through a brokerage account
• Invest by buying shares of an equity mutual fund through your 401(k) or 403(b) plan at work
• Open a Roth IRA or Traditional IRA and use it to buy shares of an equity mutual fund

Just as with regular mutual funds, publicly traded equity funds are required to distribute all dividend income and realized capital gains (if any) to shareholders each year. As a result, you have to look at your total investment value, not just the share price, which can be deceiving depending on the level of distributions made in any given time period. Most brokerages, and virtually all mutual fund companies, will allow you to automatically reinvest any distributions, in whole or part, into more shares of the fund so you increase your total ownership over time.

The minimum investment amount to begin acquiring these funds varies, but in most cases (especially for retirement accounts), they can be as low as $250 with regular monthly withdrawals from your savings account or checking account of $50 or more to help you build your investment portfolio over time. If bought through a plain vanilla brokerage account. the minimum can be $1,000, $2,500, $5,000, $10,000 or $25,000. Institutional equity funds can have minimum investments of $1,000,000 or even $10,000,000+.