An equity fund is an investment fund that invests primarily in shares. The fund management team collects money from investors and uses it to build a portfolio of numerous equities across different companies, sectors and regions. This broad diversification reduces single-stock risk — the risk of suffering disproportionate losses due to a sharp decline in one individual share. For investors, this means they do not have to buy and manage many individual equities themselves; the fund handles that. At the same time, an equity fund provides access to professional portfolio management that selects securities, monitors the portfolio and adjusts positions when needed.

Active vs passive? In principle, there are two approaches to equity funds:

• Actively managed funds: Portfolio managers select equities deliberately, weight them according to their own strategy and aim to outperform the market. They operate benchmark-independent or with flexible reference indices. In other words, they are not forced to replicate an index and can react to market changes.
• Passive funds (index funds or ETFs): These follow a stock market index such as the DAX® or MSCI World. They buy all index constituents according to their index weights. This is a rules-based approach without active intervention: If the index falls, the fund falls as well. There is no manager who can counteract during a crisis. As a result, passive funds are very cost-efficient but do not offer active risk management.
• Core distinction: Actively managed equity funds can capture opportunities and manage risks, while passive funds primarily deliver the average market return.

Whether actively managed equity funds or ETFs are the better choice depends on the investor’s objectives, risk tolerance and investment horizon. In addition to costs, the decisive factors are the net return after costs, the quality of the fund management, the degree of diversification and the ability to actively manage risks. Active funds can operate benchmark-independent and address concentration risks in major indices, whereas ETFs replicate markets efficiently and transparently.

• Costs: A common argument for ETFs is their low fees. Index funds are significantly cheaper than active funds — the Total Expense Ratio (TER) of ETFs is often below half a percent per year, while actively managed equity funds typically charge around one percent or more annually. These fund costs reduce returns directly because they are deducted from the fund’s gross performance. What ultimately matters to investors is the net return after costs. Therefore, costs are important, but not the only criterion. A slightly more expensive fund can still be advantageous if, after deducting fees, it outperforms cheaper alternatives. The performance after costs is what counts. Over long horizons, compound interest makes even small return differences significant: A one-percent performance advantage per year accumulates meaningfully over time. High-quality active funds justify higher fees through stronger net returns for investors.
• Performance and benchmark considerations: A typical goal of active funds is to outperform a designated benchmark. However, the comparison is often imperfect: Not every index is suitable for an investor’s strategy or risk profile. For example, for defensive investors, it may be irrelevant whether a fund loses "only" five percent while a global benchmark loses ten percent — both outcomes may lie outside their comfort zone. This highlights a key strength of flexible, actively managed funds: They are not required to mimic an index ("no benchmark hugging"). An experienced active manager can adjust the portfolio — for example, reduce equity exposure in turbulent periods, overweight defensive sectors or trim individual risk positions. ETFs and index-tracking funds do not have this freedom. They offer "beta", the pure market return, at low cost. Ultimately, the choice between equity funds and ETFs depends on what matters most: minimal fees and simple market exposure, or active opportunities for excess return, individual strategy and risk control. Many professional investors appreciate active funds particularly in market segments where indices show concentration risks or inefficiencies — for example, indices dominated by a handful of mega-cap companies. Active approaches can avoid such cluster risks through alternative weighting methods (such as equal-weight) or targeted diversification beyond index heavyweights.

Equity funds offer attractive return potential, but naturally come with the typical risks of equity markets. Volatility describes how widely prices fluctuate over time — higher volatility means larger potential swings and a higher likelihood of short-term losses. A key metric is the maximum drawdown, the largest interim decline a fund has experienced over a given period. For example, a global equity index lost roughly one-third of its value within a few weeks in early 2020. During the global financial crisis of 2008/09, equity markets even fell by nearly half before recovering over the long term. These episodes illustrate that while equity funds tend to deliver strong returns over time, they can experience significant temporary setbacks.

Accordingly, equity funds carry a high risk classification. In the standardised risk indicators (SRRI in the Key Information Documents), pure equity funds typically fall into the upper bands. This means: Anyone investing in equity funds should be prepared to stay invested for the long term. A horizon of at least five years, ideally longer, is recommended. Over extended periods, short-term fluctuations tend to smooth out, and the long-term growth potential of equity markets can unfold. Historically, investors with patience have been rewarded — provided they were able to sit through the inevitable market downturns.

Diversification as a key principle:
One of the major advantages of equity funds is broad diversification. High-quality funds diversify across many stocks, regions, sectors and company sizes to reduce concentration risk. However, simple or "naive" diversification — merely holding many positions — is not automatically sufficient. Weighting matters: A fund that allocates 20 percent to a single stock remains heavily dependent on that one position, no matter how many smaller holdings it includes.

Investors should therefore assess how much weight the largest positions carry. In many index funds, a substantial portion is concentrated in the top five or top ten holdings. Active funds can introduce deliberate weighting limits to avoid overexposure. They can also invest outside index heavyweights, for example in small caps or specialised sectors that are underrepresented in major indices. This enhances diversification and reduces dependence on the performance of a handful of dominant market leaders.

Diversification also means using different investment styles and factor premiums. Some equity funds systematically favour value stocks (undervalued companies with attractive valuation metrics) or small caps (smaller companies with strong growth potential). Others combine quality stocks, dividend strategies or momentum approaches, which aim to capture continuing price trends. This variety increases the likelihood that at least part of the portfolio performs well at any given time, smoothing long-term returns. Across full market cycles, well-constructed, actively diversified strategies can often deliver more robust outcomes than rigid index-based approaches.

A key characteristic of equity funds is how they handle income. Some funds distribute dividends and realised gains to investors on a regular basis. Others accumulate these earnings and reinvest them directly within the fund. Both approaches have advantages, and the choice depends on an investor’s personal objectives.

• Distributing equity funds provide regular payments — quarterly or annually — which can be appealing for investors seeking ongoing income, for example in retirement. However, it is important to remember that distributions are not a "bonus"; they are paid out of the fund’s assets. Immediately after a distribution, a fund’s share price typically decreases by the same amount. This mirrors the behaviour of individual stocks on their ex-dividend date. In other words: A distribution is essentially a withdrawal from the fund’s performance and should ideally be based on genuine earnings generated by the portfolio without eroding its substance. A fund that maintains payouts only by selling core holdings risks diminishing long-term value. Investors should therefore ensure that distributions are backed by sustainable income sources.
• Accumulating equity funds, by contrast, reinvest dividends and gains directly into the portfolio. Investors do not receive cash payments, but they benefit from compounding, as returns remain invested and can generate additional growth over time. This makes accumulating funds particularly attractive for long-term wealth building when investors do not require ongoing income.

Neither approach is inherently superior. What matters is the investor’s objective and the fund’s overall quality. For example, a dividend-focused fund may seem appealing because it pays out regularly — but its total return, including those distributions, needs to be competitive. Some income-oriented strategies advertise steady payouts, yet it is crucial to verify that these are supported by a broad and resilient earnings base. Funds relying solely on traditional high-dividend stocks risk concentration in specific sectors such as utilities, financials or telecoms, which often pay high dividends but may offer limited growth. A well-diversified distributing fund combines multiple income sources — dividends, interest and, where appropriate, alternative return drivers — while avoiding concentration risks. This helps ensure that distributions are supported by genuine returns rather than by drawing down capital.

For long-term investors, equity funds remain a proven tool for building wealth. Markets move in cycles: phases of strong momentum are followed by corrections, and bear markets are often succeeded by recoveries. Well-designed fund strategies aim to deliver solid results across an entire market cycle — participating in rising markets while cushioning the impact during periods of stress.

Active management adds value when it is applied with discipline and a clear investment philosophy. Many of the most successful equity funds of recent years follow a consistent investment style, such as high-quality companies with robust earnings growth, attractively valued value stocks with strong fundamentals, or quantitative factor models that help minimise behavioural biases. What matters is that the strategy is transparent, robust and able to navigate different market environments. Pure trend bets or thematic fads may shine temporarily, but they often revert to the mean once momentum fades.

Long-term success is typically rooted in broad diversification across companies and sectors, in combination with a thoughtful approach to risk management. This means continuously assessing valuations, balance-sheet quality and leverage — and being willing to act countercyclically when necessary. A well-managed equity fund is more than a collection of individual stocks; it is a coherent concept that adapts to market conditions without constantly changing direction.

Many asset managers rely on systematic models to capture persistent factor premia while maintaining broad diversification. This reduces reliance on individual forecasts or subjective convictions. Over time, investors who remain committed to a well-constructed strategy are often rewarded — far more reliably than those who attempt to time the market.

With so many options available, the key question is: how do you identify the right fund? The following criteria provide a clear framework for making an informed decision.

• Set clear objectives: Start by defining what you want to achieve. Are you aiming for long-term wealth accumulation, or are you seeking targeted opportunities in specific themes or regions? Your risk tolerance determines whether a more defensive or more dynamic fund is appropriate.
• Assess the risk–return profile: Has the fund outperformed its benchmark or relevant peers? Always evaluate returns in relation to risk. Metrics such as the Sharpe Ratio help compare risk-adjusted outcomes. A fund with slightly lower returns but significantly lower volatility may be more attractive than a high-performing but highly volatile alternative. Compare the fund with a relevant peer group to understand the contribution of active management.
• Costs and net results: Consider the total expense ratio, performance fees and transaction costs. A low-cost fund is not automatically the best choice. What matters is the net result after costs. Reviewing net performance over multiple time periods — one, three, five and ten years — reveals whether the fund consistently adds value. Transparency is essential: investors should understand what they are paying for.
• Fund strategy and portfolio positioning: Familiarise yourself with the investment approach. Is the fund global or regionally focused? Does it concentrate on specific sectors, styles or factors — such as technology, small caps, or a diversified mix? Broadly diversified funds can serve as core holdings, while thematic funds are typically satellite positions. It is also important to understand the manager’s philosophy: Is the approach purely quantitative, driven by stock-picking expertise, or a combination of the two? Does the fund avoid benchmark hugging and take truly active positions? Ideally, the sources of return are clear and credible.
• Sustainability and other considerations: If ESG criteria matter to you, review the applied filters or sustainability labels. Other aspects include distribution policy and tax structure — for example, the fund’s domicile.
• Avoid short-term thinking: Do not rely solely on short-term rankings. A fund that performs well in one year may lag in the next. Far more important are strategic fit, consistency over multiple years, a stable management team and a trustworthy asset manager.

Ultimately, the right equity fund is the one that aligns with your objectives, risk tolerance and investment horizon. Take time to review key documents such as factsheets and annual reports, and seek professional guidance if necessary. A strong fund communicates clearly how it invests — and how it seeks to deliver performance.

Is it still worthwhile to invest in actively managed equity funds, or have ETFs already won the race? The clear answer is: yes, equity funds remain an essential investment tool — provided they are selected carefully and held with a long-term perspective. Even in a market increasingly dominated by ETFs, actively managed funds offer clear advantages. They can adapt to changing market conditions, manage risks more dynamically and pursue a defined strategy aimed at generating excess returns.

Of course, low ETF fees are appealing. Ultimately, however, what matters is the net return after costs. A well-managed equity fund can deliver added value compared with low-cost index products — for example by limiting losses in downturns or accessing opportunities beyond index-driven market concentration.

For investors who appreciate active decision-making, seek market opportunities or value professional risk management, equity funds offer compelling benefits. Long-term investors gain access to the expertise of dedicated portfolio managers, disciplined processes and broad diversification.

The best outcomes are achieved by investors who give their investment time — and select a fund that matches their own goals, risk profile and investment horizon. In 2025 and beyond, equity funds remain far from outdated. They continue to be a robust and relevant building block for successful long-term wealth creation.