How to choose an equity fund
Choosing an equity fund doesn't have to be complicated. Discover the main factors to consider, including fund type, investment approach and how much diversification you want.
Looking to grow your money over time? Equities, also known as shares, are a popular way to invest in companies and share in their success.
One of the simplest ways to invest in shares is through an equity fund, which invests in a range of companies on your behalf.
With so many equity funds available, it helps to understand the key differences before choosing one.
What is an equity fund?
Buying individual shares can be challenging. With thousands of companies to choose from, many investors prefer equity funds instead.
Equity funds pool money from lots of investors and spread it across a range of companies. This helps reduce reliance on the fortunes of any single company. It gives investors access to stock markets around the world without having to research individual shares themselves.
Equity funds are designed to help investors grow their money over the long term. They can do this in two ways: through increases in the value of the underlying investments and through dividends1 paid by the companies held in the fund.
What happens to the income in an equity fund?
Some of the companies held in an equity fund may pay dividends. What happens to that income depends on the share class you choose:
- Income (distributing) share classes pay income to investors.
- Accumulation share classes keep the income invested in the fund instead of paying it out, which gives your investment the opportunity for greater growth over time.
Find out more about the difference between income and accumulation.
What types of equity funds are available?
Equity funds can differ in several ways, including how they're managed, the size of companies they invest in and the markets they invest in.
One of the main distinctions is between index funds and active funds:
- Index funds aim to track the performance of a specific market index, like the S&P 500 or FTSE 100.
- Active funds take a different approach – a fund manager selects shares to try to beat a benchmark2.
Equity funds can also differ depending on the companies and markets they invest in.
Large-cap funds invest in larger, more established companies and are generally considered less volatile. Small-cap funds focus on smaller companies that may offer greater growth potential but can experience larger price swings.
Some equity funds target specific countries or regions. Others invest in companies all around the world – large and small, spanning different industries and regions – helping to soften the impact if one area underperforms and allowing you to benefit when others are doing well.
How do I choose an equity fund?
If you're considering adding one or more equity funds to your portfolio, start by asking yourself three questions:
1. Do you prefer index or active investing?
Index funds aim to match the performance of a market index. Active funds aim to outperform their benchmark, but they can also fall short of it.
2. Do you want broad diversification or more targeted exposure?
Some investors prefer highly diversified funds that invest across many markets, sectors and companies.
Others may choose more targeted exposure to a particular country, region or type of company if it aligns with their investment objectives.
3. What's your attitude to risk?
Your time horizon and comfort with market ups and downs should play an important role when you’re choosing funds.
If you're investing for a goal that is decades away, such as retirement, you may be comfortable taking more risk in pursuit of higher potential returns. If you’ll need your money sooner, or are more cautious by nature, you may prefer lower-risk funds.
Learn more about how to work out your attitude to risk.
How Vanguard can help
We offer a range of solutions to help you get started, depending on how much support you want along the way:
- Build your own portfolio: if you’re comfortable being hands on, you can choose from our wide range of low-cost funds and exchange-traded funds (ETFs) to build a portfolio yourself.
- Ready-made portfolio: if you want to keep things simple, our all in one solutions – such as our LifeStrategy funds or Target Retirement funds – combine different types of investments into a single, ready-made portfolio.
- Managed services: if you’d like a helping hand, our Managed service does the work for you. We select a portfolio of investments on your behalf, based on your attitude to risk, and manage it for you over time.
It’s all about selecting the option that you feel most comfortable with.
1 Dividends are the payments some companies make to their shareholders out of their profits.
2 A benchmark is a market index, or combination of indices, that investors use to measure investment performance. An index typically measures the performance of a group (or ‘basket’) of investments, such as a basket of shares or bonds, that are intended to represent a certain area of the market.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Vanguard Target Retirement Funds and Vanguard LifeStrategy® Funds may invest in Exchange Traded Fund (ETF) shares. ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid-offer spread which should be considered fully before investing.
For further information on risks please see the “Risk Factors” section of the prospectus on our website.
Important information
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For further information on the fund's investment policies and risks, please refer to the prospectus of the NURS and to the KII before making any final investment decisions. The KII for this fund is available, alongside the prospectus via Vanguard’s website.
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