Everything You Need to Know about Equity Funds

June 21, 2019

Author: Shashank Pawar

When you invest some money into owning a corporation or an organization, or at least a part of it, you become a holder of one or more shares of the said company. Much like you, other individuals might own shares of the same organization.

All of your shares pooled together is called a Stock or Capital Stock. It means that all of you are now the shareholders of the corporation, which further implies that, for the part of the corporation you invested your money in, the returns and profits from that part of the company will be yours. Depending on the number of shares you hold, your position may or may not come with voting rights. Also, it is important to note that all shares or stocks don’t necessarily have to be equal. Once you know what a stock is, understanding what an equity fund is easy.

Exactly what is equity fund?

Equity fund, also known as Equity Security, is a fund that invests in stocks and conducts its dealings through smaller assets, like cash, which is what separates it from Bond funds that do the same using larger assets like bonds, notes, etc. An equity fund’s goal is its growth in the long term or expansion in terms of dividends. Dividends are a portion of the corporation’s profits or surplus that is given to the shareholder or deposited in their bank accounts. Equity funds are ideal for someone who has never invested in anything before or has a relatively lower amount of capital. The low-risk factor and the need for very little capital make equity funds practical and reliable.

Differences between debt and equity

The difference between debt and equity is simple. If a company uses stock from its own sources for its business requirements, then it’s using the equity. But, if it uses stocks from other sources, it then turns into a debt.

Basically, equity is the money the company already owns and debt is the money it owes to other banks or investors.

Here are some few important differences between debt and equity:

The equity fund is owned by the company. So, when it makes a profit, it forwards parts of it to the shareholders. However, just like you can’t escape paying your landlord the monthly rent, the company has to pay back the bank or lenders within a stipulated period of time.
The Equity funds are returned in the form of dividends or portions of the company’s profits or surplus. The dividends are smaller assets like cash. Debts are returned in the form of interest to the lenders. These include larger assets like Bonds, Term Loans, etc. The interest rates are pretty much fixed in this case.

The risk factor involved in both cases is the polar opposite. Although, compared to other investment deals, equity funds can be less risky, when it is pitted against debt funds, equity funds are the riskier options.