Investing in equities Equity funds explained

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Equity funds offer shortcuts to a diverse investment portfolio

Direct investment in shares can be risky, as you're reliant on the performance of a relatively small number of companies.

Therefore, you may want to consider buying equities through an investment fund, like a unit trust or open ended investment company (Oeic), investment trust or exchange traded fund (ETF), which investment in a range of shares in different companies.

Find out more: Different types of investment - learn more about your options

Equity funds tend to focus their investment on various countries, regions, industries and investment styles as a way of diversifying, or spreading risk. There are a number of different types of equity funds, each with their own characteristics and level of risk.

Equity funds can be generally split into the following categories:

Developed markets

These are the countries that are thought to be the most economically developed and therefore less risky. That does not mean, however, that investing in them is without risk. What's more, it's important to note that some companies listed in developed markets may not primarily do business in that country. It's possible that most of their business is in emerging markets, but they choose to list on one of the world's leading stock exchanges. The following are considered to be developed:

  • UK – funds invest in companies listed in the UK. Some invest for growth, while others will look to produce some growth and income (usually by investing in companies that pay high dividends).
  • North America – funds invest in companies listed in North America.
  • Europe – funds invest in companies listed in Europe. Some funds include the UK, others don't.
  • Japan – funds invest in companies listed in Japan.

Emerging markets

These are the countries that are less economically developed, and are much more volatile to invest in. However, they may offer the greatest potential for growth as their economies grow. Funds investing in emerging markets invest in some or all of the following:

  • BRICs – Brazil, Russia, India and China, the four leading emerging markets.
  • Asia Pacific – funds invest in countries in Eastern Asia, such as Korea, Vietnam and Indonesia. These funds usually exclude Japan.
  • MENA – refers to investment in the Middle East and North Africa.

Company size

Some funds invest according to market capitalisation, meaning the size of the companies they're interested in (calculated from the number or ordinary shares in circulation multiplied by the current share-price).

  • Large Cap – large, or 'blue-chip' companies, tend to pay regular dividends and offer the potential for steady growth in their share prices. They're usually worth more than £10bn.
  • Mid-cap – medium sized companies, slightly riskier than large cap companies but could still pay dividends and often greater potential for growth.
  • Small-cap – small companies are much riskier, as there's a far greater likelihood they could go bust. Generally, small caps don’t pay dividends but if they're successful, share prices can rise dramatically. 

Industry

These funds invest in particular industries, such as technology, pharmaceuticals, mining or energy, among others.

Find out more: Which? investment portfolios – we have created a set of investment portfolios that can help you decide where to invest your money, balanced with how much you're willing to put at risk.

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Last updated:

February 2016

Updated by:

Michael Trudeau

 

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