Equity fund is a mutual fund that invests principally in stocks. It can be actively or passively managed. It is also known as a "stock fund". Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time. Stocks are often categorized by their market capitalization, and can be classified in three basic sizes: small, medium, and large. Many mutual funds invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap funds.
Equity fund managers employ different styles of stock picking when they make investment decisions for their portfolios. Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other similar companies. Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole. Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks. Since equity funds invest in stocks, they have the potential to generate more returns. On the other hand they carry greater risks too. Equity funds can be classified into diversified equity funds and sectoral equity funds.