Debt Funds vs Equity Funds: Know the Difference!

You might have heard a lot about mutual funds and their types. Have you ever tried to to get deeper into the variety of mutual fund options around. Let’s make you aware of two broad categories of mutual funds in India: Debt Funds and Equity Funds. Grab exclusive details on what is a debt fund and what is an equity fund? Also, know the difference: Debt funds vs equity mutual funds.

Mutual Funds: A Brief

It’s no longer a secret that investing in equities over a long term gives the best performance across all the asset classes. However, the risk of investing in the stock market increases two fold when you invest directly. It requires a thorough understanding of tools and techniques, fundamental research and analysis, understanding of market trend, forecasting etc. It becomes very difficult for an average investor to have such skills and risk bearing capacity.

To deal with it, the concept of the mutual fund comes into existence. Mutual funds refers to a pool of investment, funded by investors and is being managed by highly skilled professionals investing in diversified funds. Here, we shall have a look at the debt funds vs equity funds and how one should chose while investing in either.

What are Debt funds? Meaning & Features

Debt funds are the pool of investments that are being managed by highly skilled professionals and invested in highly rated fixed income earning securities like central and state government bonds, Commercial papers, treasury bills and other money market instruments. It is to be noted that debt funds are investing into fixed income earning instruments and hence the risk is quite less.

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Debt funds are for those who want to balance their portfolio and want to have steady returns with minimal risk. If someone wants to invest for 2 to 3 year period and want to gain slightly higher returns than returns offered by traditional investment avenues, you may invest in debt funds.

The returns are taxed when there is a sale of debt fund unlike fixed deposits wherein interest on investment is taxed every year as per the slab. It will be long term capital gain when debt funds are sold after three years but if it is sold within three years of purchase then it will be considered as short term capital gain.

Debt funds are managed by an experienced team of fund managers and that is why one can be rest assured that his or her money is in safe hands.

Debt funds are highly liquid and one can get money back within a day’s time. Do keep in mind that certain debt funds charge exit load for withdrawal of amount within a stipulated time frame.

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What are Equity funds? Meaning & Features

Equity funds are the investment instruments wherein the major portion of amounts is invested in the stock market. Since, equity funds invest directly into the stock market, it carries inherent risk. Equity funds are mainly for wealth creation and capital appreciation. The investment horizon under equity funds needs to be quite long to get significant returns. It is always required to give enough time to let the fund grow.

It is thumb rule that higher the risk, higher the returns. One has to have risk bearing capacity so as to get higher returns. With the rupee cost averaging through Systematic Investment Plan, the risk can be minimised.

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There is a wide range of choices for investors to choose from to invest in equity funds. Instances are blue chip companies are preferable investment options for large-cap equity funds. Other can be mid cap and small cap funds that invest in future market leaders. There is one more type that called multi-cap funds which include the combination of above three types of funds.

Equity funds are for those who do not want to invest directly into the stock market, but want to gain higher returns with slightly less risk.

Debt Funds vs Equity Funds: Difference to know

Difference between Equity and Debt Fund

Particular Equity Fund Debt Fund
Objective Equity funds are best suited for creation of wealth and capital appreciation. Debt funds bring stability in your portfolio with steady generation of income.
Ideal Period of Investment The investment period here should ideally be a bit longer. The investment in debt fund should ideally be for 5 years or can be less than that depending upon the type of debt fund chosen.
Returns Approximately equity fund will give an average return of 12-14% over the period of 10-15 years. Approximately debt fund would give return around 8-10% from 3-5 years. This varies largely on RBI policy though.
Risk Risk and return go hand in hand. Equity funds involve high risk of capital loss. Debt funds involve lesser risk and very less chances of capital loss.
Taxation Investment in equity fund is highly tax effective for a period of more than 1 year. If the mutual fund units are sold within 1 year then gain is called Short term capital gain and taxed @ 15%. While if it sold after 1 year from the date of purchase, the gain is called Long-term capital gain. A tax at 10% shall be charged on LTCG above Rs.1 lakh a year (as per recent amendment). Investment in debt fund if sold within 3 years from the date of purchase attracts Short term capital gain/loss. STCG is taxed at applicable income tax slabs. But, if sold after 3 years then it is long-term capital gain/loss and is taxed at 20% rate.
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Debt Funds vs Equity Funds: Conclusion

Mutual funds seem to be the safest way to grow your money through the stock market. Highly skilled professionals are managing your money and invest it after through analysis. Equity and debt funds are considered as good investment options as equity tend to give more returns with higher risk while later brings stability and give steady returns.

One can choose any of the funds after considering factors like age, financial goals, returns expectation, risk bearing capacity and the time frame of investment etc. We hope the comparison in debt funds and equity funds makes your decision easier while planning your investments. Now, that you know the difference between debt funds and equity funds, you just need to figure out your financial objectives and invest wisely.

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