An equity fund, also called a stock fund, is an investment fund that invests most of its assets in equities, meaning shares in companies. Investors buy units of the fund and share in the capital gains and dividends the portfolio produces, as well as its losses. Equity funds are the usual core holding for investors with a long time horizon who want growth and can live with ups and downs.
An equity fund can be a mutual fund, an exchange-traded fund (ETF), a closed-end fund or a European UCITS fund. It is distinct from a bond fund, which lends money rather than owning businesses, and from a balanced fund, which holds both. According to the Investment Company Institute, equity funds made up 52% of the roughly $31.4 trillion in US mutual fund assets at the end of 2025.
Equity fund in plain terms
Owning a share is like owning a tiny piece of a business: when the business grows and earns more, your piece is worth more, and you may get a slice of its profits. An equity fund lets you own tiny pieces of dozens or hundreds of businesses at once with a single purchase.
That spread means one company failing does not sink you. But when the whole market falls, as it does from time to time, the fund falls too. Equity funds suit money you will not need for many years, so there is time to wait for markets to recover.
Types of equity fund
Equity funds are sorted along several lines, often shown together in a grid such as Morningstar's style box:
- Company size. Funds focus on large-cap stocks, mid-cap stocks or small-cap stocks, grouped by market capitalization.
- Investment style. Growth-style funds buy companies expected to expand quickly, value-style funds buy shares that look cheap against earnings or assets, and "blend" funds mix both.
- Sector and theme. Some funds concentrate on one sector such as technology or healthcare, or on a theme such as clean energy, which adds concentration risk.
- Geography. Domestic, international, global (including the home market) and emerging-market funds.
- Income. Equity income funds favour companies with a high dividend yield.
Active and index equity funds
An actively managed fund employs a portfolio manager who picks stocks to try to beat a benchmark, such as the S&P 500. An index fund simply holds the shares in a stock market index in the same proportions, aiming to match it at low cost. S&P Dow Jones Indices' SPIVA scorecards have repeatedly found that most actively managed US large-cap funds trail their benchmarks over periods of ten years or longer, after fees. Defenders of active management reply that some managers do add value, particularly in less efficient corners such as small companies and emerging markets, and that active funds can avoid the most overvalued shares in an index. Even so, that finding, together with lower costs, has driven a steady shift of money towards index mutual funds and ETFs.
Costs differ widely. ICI reports that the asset-weighted average expense ratio of US equity mutual funds was 0.40% in 2025, while index equity ETFs averaged 0.14%. Active funds also tend to have a higher portfolio turnover ratio, which adds trading costs and can bring taxable gains.
Risks and how they are measured
The main risk is market risk: in a bear market equity funds can lose a third or more of their value, and it may take years to recover. Funds also carry style, sector, country and currency risks depending on what they hold. Style risk is easy to overlook: growth and value shares can lead or lag each other for years at a time, so a fund can trail the broad market for a long stretch simply because its style is out of favour, not because its manager has done anything wrong. Concentrated sector and single-country funds can swing even more sharply than the market as a whole. Investors judge volatility with standard deviation, sensitivity to the market with beta, and skill compared with the benchmark with alpha. A fund fact sheet usually shows these figures alongside the top holdings and sector weights.
Rules and taxes
In the United States, a fund whose name suggests equities must keep at least 80% of its assets in them under the SEC's Names Rule, as amended in 2023. US equity funds pay out dividends and, usually near year-end, a capital gains distribution, both taxable in ordinary accounts. Holding them in a tax-advantaged account such as an individual retirement account (IRA) defers that tax. In Europe, UCITS rules limit how much a fund can hold in any single company, which keeps retail equity funds broadly diversified.