3 Tenets of Equity Funds

In my last blog, we discussed that most Millennials and GenXers will have to fend for themselves for retirement planning. Instead of offering a pension, most employers today offer defined contribution retirement plans (401k for businesses, 403b for non-profits like universities, 457 for government employees).

3 Pillars of Equity funds Market capitalisation Investment style Geography

Don’t let the numbers confuse you — they are just different sections of the Internal Revenue Service (IRS) tax code. Employers offer a retirement plan to employees which they can invest in for retirement and in most cases match a certain percentage of the amount the employee contributes. There are some DIY tools or retirement calculator, but mostly you on your own to make your investment choices.

It may sound like a daunting task, but let’s look under the hood to get a basic understanding of Equity funds as an investment option for retirement. A typical retirement plan may have anywhere between 15 to 30 investment options. In certain cases, the list may contain 100+ options.

The longer the list, the harder it is for employees to make a sensible choice. Keeping a tab and trying to understand so many options is not an effortless task and requires a lot of time. Sometimes dilemma results in inaction, and you may end up parking your hard-earned money in assets that don’t offer a good return or charge higher fees.

Let’s take an example of a retirement plan that has 15 options. A typical line up comprises 7–8 equity funds,4–5 bonds and 1–2 options focused on specific assets like real estate, oil & gas, etc. Let’s dig deeper into equity options. The first question in your mind may be ‘why 7–8 equity funds?’ The idea is to offer choice and diversification so you don’t pull all your eggs in one basket.


The 1st level of differentiation is geography or location. Most companies domiciled in the United States are on one of the US stock exchanges such as NYSENasdaq. Keep in mind, in today’s globalized world, you will also come across foreign companies listed on US stock markets. The companies based out of Europe or Asia are listed on stock exchanges in those regions. Usually, you will see a fund for emerging markets that have companies from countries such as Brazil, Russia, India, China and South Africa (BRICS).

Geography Equity view
You get the point: Location.

Market Capitalization: Size

The 2nd level of differentiation is the size. We can group publicly traded companies into 3 different categories based on market capitalization: Large-cap, Mid-cap, and Small-cap. Large-cap is short for Large Market Capitalization. Think of it this way — you can relate to the size of companies based on its revenues or sales figures. The financial market determines that based on market capitalization i.e. shares outstanding X price per share.

A company with a market capitalization of >$10 billion is called Large-cap. Common names include Walmart, Apple, Alphabet, Microsoft, Ford, GE, JPMorgan Chase etc. Mid-cap (Middle Market capitalization), usually have a market capitalization between $2 billion and $10 billion. Small-cap (Small Market Capitalization) is usually below $2 billion. Large-cap is considered more stable and less risky compared to Mid-cap and Small-cap. Mid-cap comes after Large-cap in terms of riskiness and Small-cap companies are usually associated with the highest risk.
Market Cap Equity view
The Second differentiator is Size.

Investment Style

The 3rd differentiator is based on which stocks the investment manager has picked. These again can be of three types: Growth, Value, and Blend. A company is considered a Growth stock if it’s growing at a higher rate than peers or industry, and you can bank on capital appreciation in the future. Value stocks are considered to be trading at lower than the intrinsic value (bargain deals) and usually pay regular dividends.

Blend style is a combination of Growth and Value. Style based funds are usually found in the funds’ lineup of the retirement plans. The fund prospectus provides details about the investment strategy of the fund. So if you want exact details, you may want to go through that. Usually, the terms are written in a way that allows flexibility for the investment manager. One example is the Apple stock, which may be found both in growth and value funds.Style Equity view
The Third differentiator is Style.
The above three ways to differentiate are the most basic to get an idea about Equity funds. But, unfortunately, when you go through the list of funds in your retirement account (401k, 403b,457), you may not find an obvious distinction. Instead, you will find names like Vanguard S&P 500 Index fund that will suggest it is US-based and Large-cap. S&P 500 contains top 500 Large-cap companies listed on US stock exchanges. Most Mid-cap & Small-cap funds refer to their size in their nomenclature.

Some retirement plans may have one International stock fund covering various geographies. Unless you dig deep into offer documents, you may not always gather the level of market capitalization, geographies covered and other important information. The fund’s name is a hit or miss — it sometimes gives you the required information, but not always.

Target Date Funds, Active and Passive Funds

Target date funds are widely used nowadays which are a combination of various Equity and Bonds securities or funds. Then there are Active and Passive Funds. Active Funds pick various securities to invest based on the fundamentals or technical analysis. Some of these funds may follow the top-down, bottom-up approach to select securities. Passive Funds just try to replicate indices like the S&P 500, which means they choose to invest in the securities part of a popular equity index such as the S&P 500.

After you understand the various options available, the next step is to choose the most suitable options for your retirement. If your retirement is not too close, then you should put some of your assets in Equity funds as they offer better returns compared to Bonds over a longer period of time but keep in mind they are riskier as well. To do all this work, some people hire a financial advisor or advisory services who may charge 0.25% to 2% of total assets, as fees.

Plootus does it for free. You may ask why? We are on a mission to democratize financial planning. Our app Plootus (available on Apple and Android) will not only choose the best performers to suit your retirement needs but will also help you decide how much to invest in the various options available to you. We are here for free of cost portfolio optimization. Our algorithm first estimates how much money you will need for your retirement period. The best thing about Plootus is it’s free!.

That’s it for today. I know this is a lot to digest, but for something as crucial as retirement planning; it is important to understand every aspect. We will look into Bonds next time. I’m sure you will have a lot of questions as you go along. Feel free to use the comments section and we will be happy to answer any questions you may have. Until next time!

Author: Sunil Gangwani, Co-Founder, Plootus
http://www.Plootus.com: 10 minutes could add 50 thousand dollars or more to your retirement account!

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