Equity funds account for more than half of the assets held by mutual funds. There are a few different factors than can be taken into account when describing these funds:
- The fund’s purpose and risk level.
- The size of the companies whose stock is held by the fund.
- The geographical location of the companies in the fund.
In addition, there are two special types of equity funds that are not described by those factors:
- Index Funds.
- Sector Funds.
Index funds are meant to provide the investor with an easy tool for matching his assets to a given stock index. Every index fun is designed to be a perfect mirror of a specific index fund. Today, there are hundreds of index funds and it is difficult to find a stock index that does not have a matching fund.
The S&P 500 has the most index funds based on it. Empirical research has shown that most investment managers have a difficult time recording consistently higher yields than index funds. Due to this, many investors prefer to place their money in funds linked to large indices, such as the S&P 500 and the DJIA. Index funds manage assets worth hundreds of billions of dollars.
Sector funds place their money in leading companies in specific economic sectors. Recently, sector funds have become quite popular and fund managers are offering a wide variety of sector funds that cover the entire economy. Particularly popular sectors for fund investment include:
- Financial Services.
- Health Care and Medical Services.
- Software and Computer Services.
It is worth noting that Exchange Traded Funds, which we discussed in chapter 3, are an alternative to index and sector mutual funds.