What are equity diversified mutual funds and who chooses these types of funds?
An equity fund is a mutual fund that mainly invests in equities, and while these funds generally hold mostly equities in the portfolio there will be a small percentage of the portfolio in cash or money market investments for liquidity purposes. The goal of equity funds for investors who choose this option is the capital appreciation offered. Equity funds are considered the higher risk, because the funds invest in individual businesses and companies through stock. The company shares are typically bought on the secondary market but can also be acquired by the fund through IPOs as well. There are many factors that can have an impact on the equity market, and this is one of the reasons why an equity fund is considered a risky investment most of the time.
Equity diversified mutual funds do not invest in only a small range of companies, instead the shares purchased cover most of the market offerings. These mutual funds will invest in small, medium, and large cap companies, as well as choosing companies from a range of sectors and industries. This diversification does help lower the risk involved a little, but even with it these funds are usually chosen by higher risk investors in the hopes of a higher return as well. An equity fund usually has the goal of moderate to long-term capital appreciation instead of short-term gains. In some cases these funds will offer a significantly higher risk, but in some cases investors will lose some or all of the capital used for the investment.
The NAV of equity diversified mutual funds will be sensitive to any changes in the equity market, and to any price changes in the shares the fund holds. This type of mutual fund includes two distinct and different types of risk for an investor, and these are the systemic risks and non-systemic risks. Systemic risks are those risks associated with the equities market, and these risks cannot be completely prevented or eliminated. Non-systemic risks are those risks that are associated with a specific company or stock. This type of risk can be eliminated in many cases by careful research and evaluation of the stocks that the fund invests in, as well as portfolio diversification so that there is a range of share types and sectors in the fund portfolio.
Equity diversified mutual funds are not ideal for most investors, because these funds are considered very risky and often result in investment losses. For investors willing to take higher risks in exchange for the chance of a better return, then this type of mutual fund may be the right choice. Every investor has a risk level set that should not be exceeded, and for some investors the risks associated with this type of fund is too high. Before deciding if this fund type is a good choice for your capital you need to examine your acceptable risk and determine if a specific equity fund fits in this range.
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With a long history of small-cap investing, Paradigm Capital Management employs a disciplined, bottom-up approach with an emphasis on fundamental analysis and extensive management contact.
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