6.1.2.1 Equity Funds
Equity funds invest in equity securities, also known as common stock. Within the category of equity funds, there are three major types of funds: growth, income, and a third, combination type called “growth and income.” Equity funds also may be categorized as growth, value, or blend. These and other types of equity funds are discussed later.
Growth funds contain stocks of growing companies. These companies commonly reinvest their earnings into expansion, acquisitions, and research and development and, therefore, pay low or no dividends. Growth stocks are said to be expensive—that is, their price/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. Such investors have relatively long-term investment horizons and do not require regular income from this investment and, thus, are willing to wait for a company to hit it big in the future.
Income funds, in contrast, buy stocks of well-established companies that pay nice dividends. Equity income funds typically produce higher returns than money market or bond funds but are still considered to be relatively conservative investments. Because equity income funds are more volatile than money market and bond funds, they are more appropriate for investors with investment horizons longer than a year.
A growth and income fund or combination fund combines characteristics of the equity growth fund and the equity income fund. The growth and income fund bridges the needs for future growth and current dividends. These funds invest in a combination of stocks of companies with strong growth potential and well-established companies that provide decent dividends.
Value funds invest in companies whose stocks are trading for less than the portfolio managers think they are actually worth. These companies may be thought of as being out of favor. Even though th