All things Equity: A guide to investing with equity funds

Business across the world is driven by companies operating in every imaginable sector. If you want to share in the profits that companies can make, then you could buy individual company equities (also called shares) or you could invest in equity funds.

Equity funds bundle a variety of company equities into one product, seeking to give investors a convenient way to access the stock market. When you buy into a fund, you’re buying a small slice of every company held by the fund.

There are equity funds for every area of the stock market and for every need, for example:

• Large cap or blue-chip funds that focus on large corporations with a high market value
• Mid and small cap funds, focusing on medium and small listed companies with growth opportunities
• Regional funds, covering specific countries or areas, such as Germany, the eurozone, the US
• Sustainability funds, which prioritise ecological and sustainable investment choices
• Thematic funds, which pick companies with a unified theme, such as energy, infrastructure or education
• Growth funds, which prefer companies that reinvest in their business to target higher earnings and value funds that seek cheap hidden gems neglected by the market.

Active equity funds are monitored by a management team of experts in their area, who analyse, select and trade the company shares held in the fund, aiming to achieve a performance for their investors that is better than the market.

A passive fund uses a computer programme to track a particular area of the market, aiming to make the same return as this area.

As with all funds, both come with management charges, but these vary depending on the fund. All details of charges are available in the prospectus or the PRIIPS KIID of the fund.

Long-term returns: Historically, investing in equities over the long term has been considered as generating positive returns. Even if equity markets tend to suffer higher short-term volatility compared to other type of investments, they may also offer more potentially interesting returns for patient investors.

Spreading risk: Equity funds are invested in a wide range of companies, so investors are not over-exposed to a single company.

Flexibility: Most funds can be easily traded. They can usually accept one-off or regular payments.

Expert advice: picking the winners can be difficult with the different listed companies around the globe. Fund managers, supported by analysts and risk managers, have the tools and the expertise to identify the companies with the higher potential.

Volatility:  Investing in equities comes with a higher risk of price fluctuations, also known as volatility, which makes this type of investment unsuitable for those that have a short- term investment horizon.

Market falls: News events, political changes and many other factors can cause equity prices to drop dramatically. In extreme cases, companies can go bankrupt.

Although funds should spread your risk and equities tend to perform well over the longer term, it’s important to be aware of the risks that individual stocks can suffer from time to time.

The first step is to consider how long can you keep your money invested and how much risk you want to take with it. Then, use the risk rating guidance to pick a fund that matches your level of risk.

Although individual stocks can suffer dramatic falls, it is unlikely that many stocks experience the same extreme losses at the same time. This is why a fund, which is well diversified* in a high number of securities (normally over 100), can potentially mitigate individual losses.

Equity funds invest in many companies, allowing you to spread your risk and potentially enhance your opportunities.

It’s important to be aware of the risks and pick a fund that matches your risk appetite. We have a wide range of equity funds for you to explore.

^* Diversification does not guarantee a profit or protect against a loss.