“Risk comes from not knowing what you’re doing” – Warren Buffett
There is a misconception regarding mutual funds that ‘all Mutual funds are the same”. Well, are they? No! They’re not. Mutual funds in India have seen a boom in urban cities but still, there is a lack of awareness among the rural section! Mutual funds are distributed in various types, among the whole lot, two of them are chief: Equity mutual funds and Debt mutual funds.
Both serve the same purpose which is making mutual fund investments, but they are way different from each other. Thus, in this blog, we’ll be understanding which mutual fund is better among these two!
Equity mutual fund vs debt mutual fund: which is better?
See, both are equally good, it just depends on you and your preferences for investing. Based on the factors mentioned below you can ease your decision for either investing in an equity mutual fund or a debt mutual fund:
|
Basis |
Equity Mutual Funds |
Debt Mutual Funds |
|
Investment Constituents |
These funds primarily invest in stocks or equity-related instruments of companies. |
Debt funds invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and other debt instruments. |
|
Aim |
They aim to generate capital appreciation by investing in the growth potential of businesses across various sectors and market capitalizations. |
They aim to provide regular income and capital preservation by investing in interest-bearing securities. |
|
Risk |
Equity funds are subject to higher market risk and volatility due to their exposure to the equity markets. |
Debt funds typically carry lower risk compared to equity funds as they invest in fixed-income securities with predetermined interest payments and maturity dates. |
|
Returns |
Equity funds have the potential to offer higher long-term returns compared to debt funds, albeit with greater volatility. |
Debt funds generally provide more stable and predictable returns compared to equity funds. |
|
Taxation |
Long-term capital gains (LTCG) from equity mutual funds held for more than one year are taxed at a rate of 10% without indexation, exceeding gains of ₹1 lakh in a financial year. Short-term capital gains (STCG) from equity funds held for one year or less are taxed at a rate of 15%. |
LTCG from debt mutual funds held for more than three years is taxed at a rate of 20% with indexation. STCG from debt funds held for three years or less is added to the investor’s income and taxed at their applicable slab rate. |
|
Time Horizon |
Equity funds are suitable for investors with a long-term investment horizon (typically 5 years or more) who are willing to withstand short-term market fluctuations. |
Debt funds are suitable for investors with a shorter time horizon or those seeking regular income. |
|
Ideal for |
Equity funds are ideal for investors seeking long-term capital appreciation and who have a higher risk tolerance. |
Debt funds are suitable for investors seeking stable income, capital preservation, and lower risk exposure. |
What is an equity mutual fund?
Are you the type of investor who does not risk aversive and wishes to stay invested for a longer time? If yes, then an equity mutual fund is for you! This is because equity funds invest solely in the stocks of various companies across all market capitalizations.
For instance, Large-Cap funds are invested in large businesses/companies, Mid-Cap funds are invested in mid-sized businesses, Small-Cap funds are invested in small companies and multicap funds are invested in all three areas mentioned above!
Equity mutual funds are believed to be more volatile than debt funds when invested in the short term. They are also known as Growth Funds. The returns provided by equity funds are high but again the risk factor is high too! This is because the performance of the company you have invested in plays a critical role in deciding investors’ returns. As stated above it is a perfect investment opportunity for people who want higher returns and are willing to invest in the long term.
What is a debt mutual fund?
If you are an investor, who wants to take things at a slower pace, you don’t mind not getting high returns as an equity mutual fund & you want low/moderate risks, then Debt Mutual funds are your perfect investment option!
Debt is often taken so that one can meet his/ her financial commitment or make money available for future needs. This type of fund is invested in fixed-income securities such as fund securities, and treasury bills. In short, governments and companies when in need of money, borrow money and in return provide them with an interest along with the money.
Low risk is there because they are being invested in fixed options that come with a fixed interest rate along with a fixed maturity date, like Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds, and Monthly Income Plans, etc.
Such kinds of investments can be beneficial for investors who are looking for a regular income (interest and capital appreciation) along with the benefit of minimal risk. Consult with our mutual fund advisor so that you can confidently make your own decisions and achieve your goals.
