What to consider when choosing an equity fund
Considering investing in equity funds? We explore what you need to know, including how to pick between index and active, and whether you want something broad or more focused.
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 your money in a wide mix of companies, saving you from having to pick individual shares yourself.
With so many equity funds to choose from, it’s important to know what makes each fund unique and what they can offer. If you’re building your own portfolio, understanding these basics will help you make confident choices in your investing journey.
What are equities?
Equities are a way to own a stake in a company. When companies need capital to grow, develop new products or expand their operations, one way they can raise money is to issue shares to the public. Share prices can fluctuate over time and are influenced by things like the company's financial performance, economic conditions, market trends and global events.
Investing in shares can be a powerful way of growing your wealth over the long term. Shares typically offer higher potential returns than bonds1, but they come with greater swings in prices. Bonds are typically more stable but offer lower potential returns.
Why invest in an equity fund?
Buying individual shares can be challenging because of the vast number available. For this reason, many people prefer to invest in equity funds. These funds pool your money with other investors’ money and invest it in a diverse range of company shares. This helps to spread your risk and potentially smooth out returns relative to owning individual shares. They can offer you exposure to the world’s stock markets without you needing to do in-depth research on individual companies, and often come at a lower cost than investing in individual shares.
Vanguard offers a range of equity funds. Some are index funds, which typically try to match the performance of a specific index (also known as a ‘benchmark’2). Others are active funds, where a fund manager picks equities to try to beat a benchmark.
All equity funds share a common goal: to grow investors’ money over time. They can achieve this if the value of their investments rises or if they reinvest any dividends3 that the companies in the fund pay out. Equity funds typically have two types of share class: ‘income’ (also known as ‘distributing’) and ‘accumulation’. Income share classes pay income to investors, while accumulation share classes let that income build up (or accumulate) in the fund. Find out more about the difference between income and accumulation.
Types of equity fund
Equity funds come in all shapes and sizes. For example, large-cap funds invest in major, well-established companies, generally offering more stability and less price fluctuation. In contrast, small-cap funds focus on smaller, fast-growing businesses, which can provide greater growth potential but often come with higher risk.
Some equity funds target specific countries or regions, whereas others invest in companies around the world. Many funds are highly diversified, spreading investors’ money across thousands of companies—large and small, spanning different industries and regions—which helps to reduce the impact if any one company, industry or region performs poorly.
Key considerations when choosing an equity fund
If you want to include one or more equity funds in your portfolio, there are few things to think about:
Will you opt for index or active funds?
Index funds closely mirror the performance of a specific index, like the S&P 500, which tracks the 500 largest US companies, or the FTSE 100, which tracks the 100 largest companies listed on the London Stock Exchange. Active funds try to outperform a specific index, but they can also underperform.
What type of exposure do you want?
Do you want your investments to be highly diverse, giving you protection against downturns in particular areas of the market? Or would targeting a specific country or region make more sense for your financial goals?
What’s your attitude to risk?
If you’re investing for retirement in 30 years and are comfortable with the risk that comes with investing, you might opt for riskier investments with higher potential returns. If your goal is a couple of years away or you’re more cautious, you may favour funds that offer stable returns. Learn more about how to work out your attitude to risk.
Investing at Vanguard
We offer a range of solutions to help you in your investment journey.
If you want to build your own portfolio, you can choose from our full range of funds. Under the ‘Building my own portfolio’ tab, you can select equities and then filter the funds by region, risk level and management type.
Alternatively, you can keep it simple by picking one of our LifeStrategy funds or Target Retirement funds. These combine shares and bonds in one ready-made portfolio, ranging from 100% shares and 0% bonds to 20% shares and 80% bonds. The key difference is the LifeStrategy funds maintain a fixed proportion of shares and bonds, whereas the Target Retirement funds gradually shift your exposure from shares to bonds as you get closer to your target retirement date.
If you’re not confident choosing funds, we also offer a managed service where we select funds for you based on how you feel about risk and then manage your portfolio going forwards.
1 Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.
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.
3 Dividends are the payments some companies make to their shareholders out of their profits.
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
Vanguard only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.
For further information on the fund's investment policies and risks, please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The KIID for this fund is available, alongside the prospectus via Vanguard’s website. This is designed for use by, and is directed only at persons resident in the UK.
The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of shares and /or units of, and the receipt of distribution from any investment.
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