When I think of confusing, I think of the AFL tribunal, a crazy movie called Inception and the adoration for that Justin Bieber guy.
For other people, merely mention ‘equity funds’ and their first response is, “huh?”
An equity fund is something that sounds confusing, yet if you hold one in your portfolio it’s very similar to holding a large amount of different shares.
If investor A looks at their portfolio and sees BHP, Westpac, Woolworths etc. for a total of fifteen companies, they can easily identify what they own.
If investor B looks at their portfolio and sees an equity fund, it may indicate the value of their investment, but little else to show what they actually own.
However, that can be deceiving.
While investor A can say, “I own fifteen companies – I’m diversified.” Investor B can say, “That’s nothing, I own 500 companies – I’m truly diversified.”
The reason being, an equity fund will pool investors’ money to buy a large variety of company shares.
The fund will be categorised by the companies in the fund, usually by company size, industry sector or country.
The performance of those companies will determine the performance of the fund.
Importantly, a portfolio consisting of equity funds should be subject to less volatility than a portfolio consisting of a handful of individual shares.
If five companies take a dive amongst a 500 company equity fund, you’d hardly notice it; yet if five companies take a dive amongst a portfolio of fifteen, it would be impossible to ignore.
Combining equity funds within a portfolio can offer exposure to a wide variety of companies in Australia and overseas, and without the risk of holding a smaller number of those companies individually.
Such broad diversification is the key ingredient to lowering portfolio risk and less confusing than the cult of Justin Bieber!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we think we’re Australia’s top financial adviser. We think we’re the best financial advisers in Tasmania.
