For far too long, there has been much uncertainity and debate over whether one should invest in debt funds or equity funds. What’s worse, a large proportion of people carry the misconception around that all mutual funds are the same. There are various types of mutual funds, chief among these are debt and equity mutual funds. The primary difference between the two comes from where the money is invested. Let’s understand this better to select the right fund for you.
But, what is equity fund?
Equity funds, also known as stock funds, invest the majority of the corpus (at least 65% of their corpus) in equity and equity-related securities. Equity funds have the potential to generate significantly higher returns than hybrid funds or debt funds. The performance of the company plays a significant role in deciding the returns earned by investors.
What is a debt fund?
A debt fund, also known as bond fund, invests a significant portion of an individual’s corpus in fixed income or fixed income-generating securities such as debentures, corporate bonds, government bonds, treasury bills, commercial papers, etc. By investing in these opportunities, bond funds reduce the risk factor by a considerable margin. Thus, these mutual funds are ideal for investors with a low-risk profile.
Equity fund vs Debt fund
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Equity fund |
Debt Fund |
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Where do they invest? |
These funds invest a majority of their corpus in the stock market |
These funds invest a majority of their corpus into debt securities such as government bonds, corporate bonds, bonds issued by banks, etc. |
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Ideal for whom? |
These funds are ideal for investors who are prepared to ride the ups and downs of the stock market. |
These funds are ideal for investors with a low-risk profile |
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Returns earned |
Returns on equity funds are linked to the market and are generally high |
Returns on investments are lower as compared to equity mutual funds |
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Transaction cost |
Equity funds have high transactional costs |
Debt funds have a relatively lower transaction cost |
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Equity funds enjoy zero long-term capital gains tax or LTCG tax |
LTCG tax on debt funds are charged at 20% with the benefit of cost indexation |
Different investors have diverse requirements. Some invest in mutual funds to achievesignificant returns to meet their goals;on the other hand, some cannot afford to take high risks. Some investors may have long term goals, whereas some may have short to medium tenure goals. Align your personal and financial goals with your mutual fund investments. Happy investing!
