Equity mutual funds and debt mutual funds are funds which come out as investment instruments which are capable of providing inflation-adjusted returns to achieve vital financial goals. But, given the thousands of mutual funds that one can invest in, it is not easy to choose the right one. It is a very challenging task to decide on which mutual fund would be ideal for your investment goals. Even if you pick the right scheme, you must decide whether to invest in equity funds or debt funds.
It is not about which one is better. The right answer may be both. But, you need to know where to allocate your assets. By picking the right instrument, you can avoid unnecessary risks and can get the best out of your investment.
First, let’s know what are debt and equity mutual funds:
Debt Mutual Fund – Definition
Debt mutual funds are the type of funds that mainly invest in a mix of debt or fixed income securities such as Government Securities, Treasury Bills, Corporate Bonds, Money Market Instruments, and other debt securities.
Equity Mutual Fund – Definition
Equity mutual funds are the type of funds which mainly invest in stocks, rights, warrants, and other equity related instruments. They are also known as stock funds.
Equity Mutual Fund Vs Debt Mutual Fund – Know the Difference
|Debt Mutual Fund||Equity Mutual Fund|
|Nature of the Fund||In Debt funds, the money raised from investors are put in fixed income securities like government bonds, corporate bonds, non-convertible debentures, and other debt related instruments.||In Equity funds, the money raised from investors are put into equity and equity-related instruments like stocks, rights, and warrants.|
|Risk Factor||Debt funds are less risky than equity funds since the money invested is in risk-free government bonds. However, the corporate bonds are not entirely risk-free.||The volatility in equity funds are comparatively high since the money invested is in stocks. Plus, stocks highly influenced by economic factors such as inflation, GDP, currency fluctuations, interest rate decisions, and among others.|
|Tax Liabilities||Debt funds which are held for more than 3 years are taxed at 20 percent with indexation. In short-term debt funds, the capital gain is added in total income and then taxed according to the income tax slab.||The equity mutual funds are basically for long-term investments which held more than a year are exempt from taxes. But, the equity funds held for 12 months or less are taxed at a flat 15 percent.|
|Market Return||In debt funds, one can get steady returns but in a constant range. It is because of the money invested in government bonds and treasury bills. The risks are less associated with them.||In equity mutual funds, one can get higher inflation-adjusted returns since the money is invested in stocks. Thus, equity mutual funds can increase your wealth as compared to the debt funds. However, the possibility of losing is also possible since the market is volatile.|
Final Thoughts: –
In a nutshell, we can say that both investment avenues have their own benefits. One is good for getting not guaranteed but certain returns and another is good for getting inflation-adjusted high returns. If an investor has not high but some risk of tolerance then equity mutual funds could serve him/her better than debt funds. This made equity mutual fund an essential asset class for the long-term growth of savings and market returns that can beat inflation and help in achieving the financial goals.
On the other hand, the debt mutual funds may not be on par with equity mutual funds in terms of returns, but it is clearly the better option from other investment options such as Fixed Deposits (FDs) in terms of tax-efficiency and returns.
The decision is, therefore, a complex one involving certain factors. In order to simplify your choice, you can use this difference and understand your financial needs. Once you do that it will be much easy to choose between equity mutual funds and debt funds. Nevertheless, if you have any query or would like to suggest something then don’t forget to mention in the comment section below. We will be happy to answer all your questions.
Infographics: Equity Vs Debt Mutual Fund