Equity funds or debt funds: Make an informed decision before investing

Be it equity or debt – what difference does it make as long as I’m investing in mutual funds” It’s a question that may arise in the minds of new investors before they start investing in mutual funds. However, it’s important to know that the choice between equity or debt funds plays a very crucial role in shaping one’s investment portfolio. Thus, it’s essential for new investors to have a thorough knowledge of different types of mutual funds before they embark on their investment journey.

Broadly speaking, mutual funds are generally categorised as equity funds, debt funds and hybrid funds. Each category has its own unique characteristics and suitability for different investors. Let’s check out equity vs debt funds so that you can decide which one is more suitable for your financial goals.

• Table of contents

1. Equity vs debt funds 
2. difference between equity and debt mutual funds 
3. Equity vs Debt funds
4. Why should you invest in equity and debt funds?
5. Steps to invest in equity and debt funds.
6. FAQ

Equity funds vs debt funds

Equity mutual funds are investment instruments that largely allocate pooled capital towards stocks across various sectors, market capitalization and investment styles. These funds aim to generate long-term capital appreciation for investors over time by actively investing in shares of companies that demonstrate potential for strong future growth.

difference between equity and debt mutual funds

A debt fund primarily invests in fixed-income securities such as government and corporate bonds, debentures, treasury bills, etc. These funds seek to generate returns for investors primarily through interest income and capital appreciation. Debt funds have comparatively lower risk profile as compared to equity funds, making them a suitable choice for investors seeking to mitigate impact of volatility on their investment.

Equity funds

Equity mutual funds invest the pooled corpus of money from investors primarily in stocks and shares of different companies. In most equity funds, over 65% of the portfolio consists of investments in equity and equity-related instruments. Such funds aim for higher returns over the long term through investments in a mix of large-cap, mid-cap, and small-cap stocks.

Debt funds

Debt mutual funds invest the pooled corpus of money from investors in debt or fixed-income instruments, such as bonds, debentures, government securities, commercial papers, treasury bills, and certificates of deposits, among others. Such funds aim for relatively stable returns via a diverse portfolio of fixed-income securities.

Equity vs Debt funds

Here is a comparative analysis that will give you a clear idea about the difference between equity and debt mutual funds:

• Investments: Equity funds invest in equities or equities-related instruments such as derivatives and target long-term capital appreciation. Meanwhile, debt funds invest in debts or money market instruments, commercial papers, certificates of deposits, treasury bills, non-convertible debentures, corporate bonds, and government securities. Debt funds aim for a regular and steady income.
• Risk appetite: Equity funds are volatile and considered slightly high-risk investments. In contrast, debt funds are associated with moderate to low risk for the investor.
• Return on investment: Returns on equity funds have been higher in the long term in comparison to debt funds.
• Timing: In both debt and equity funds, more than the timing of buying and selling, the duration of the investment is important. Staying invested for a longer duration has the potential to generate returns.
• Taxation: Equity funds are subject to a 15% tax (plus applicable surcharge and cess) on short-term capital gains. Long-term capital gains on equity funds are exempted from tax up to Rs.1 lakh annually, and anything beyond that is taxable at 10% tax rate without indexation (plus applicable surcharge and cess).
• Debt mutual funds will be subject to taxation based on the applicable slab rates. The previously available long-term capital gains (LTCG) tax benefits and indexation benefits on debt mutual funds will no longer be applicable.

Why should you invest in equity and debt funds?

There are several benefits that investments in equity or debt funds offer. Let’s have a quick look at some:

• Diversified portfolio: These funds invest in multiple sectors and industries, which builds a diversified portfolio for the investor.
• Liquidity: Since mutual funds can be bought and sold at any given time, they ensure high liquidity.
• Expert management: Experts in the field manage mutual funds and make informed decisions on behalf of the investors.
• Flexibility: Both equity and debt funds offer flexibility to the investor to invest as per their financial situation and overall objectives.

Steps to invest in equity and debt funds.

Equity and debt funds are advisable investment options for a new investor. Here are some steps that need to be kept in mind when investing in these two funds:

• Identify your investment goals: Ensure that the fund’s objectives are in line with your long-term goals.
• Understand the fund type: Assess which fund scheme aligns with your lifestyle and financial objectives.
• Diversify your investments: Diversification is the ultimate hedge against market volatility. Thus, spreading one’s investments across equity and debt funds is highly recommended.
• Seek expert advice: The financial markets are a highly specialised field; thus, it is prudent to consult a domain expert before making any investment decisions.

Mutual funds are appropriate investment avenues for new investors. For those seeking low-risk investment, debt funds are an apt choice – with low to moderate returns; these funds seek to mitigate loss of capital. On the other hand, equity funds may be riskier in the short term, but they can provide a higher return on investment in the long run.

While equity funds invest in equities or equities-related instruments, debt funds invest in debts or money market instruments, commercial papers, certificates of deposits, Treasury bills, non-convertible debentures, corporate bonds, and government securities. Both funds give you the option to diversify your portfolio and reduce the overall risk. For a better understanding of both equity and debt funds and to make an informed decision before investing, you can always seek the advice of a market expert.

FAQs:

Which is better: equity funds vs debt funds?
Equity funds invest primarily in stocks, while debt funds invest in fixed-income securities such as bonds. Equity funds are generally considered to be more volatile and riskier than debt funds.

Is the SIP option available in equity and debt?
Both equity and debt mutual funds offer SIP options, but the better option depends on your investment goals and risk profile. Equity SIPs are better suited for long-term wealth creation, while debt SIPs are better suited relatively steady returns and mitigate loss of capital.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.