3.1.2.1. Equity Funds
Equity funds invest in equity securities, also known as common stock. Equity funds may be divided into several types including growth, income, growth and income, value, or blend. These and other types of equity funds are discussed next.
Growth funds contain stocks of growing companies. These companies commonly reinvest earnings (profits) into expansion, acquisitions, and research and development, and therefore pay low or no dividends. Growth stocks are often expensive—that is, their price-to-earnings ratios are high—because the market perceives the companies’ potential future earnings as high. Investors who invest in growth funds have capital appreciation as their primary goal. In other words, they expect to make money through an “appreciation” in the value of their “capital” invested in the fund and stocks within the fund. Such investors have relatively long-term investment horizons and do not require regular income from this investment. They are willing to wait for a company to hit it big in the future.
Income funds, in contrast, buy stocks of established companies that pay solid dividends. Equity income funds typically produce higher returns than money market or bond funds but are