Debt Funds Vs Equity Funds : The difference

(Last Updated On: April 9, 2017)

It is 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 technique, 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. It’s a pool of investment, funded by investors and is being managed by highly skilled professional and invest in diversified funds. In this post, we have a look at the debt funds vs equity funds and how one should chose while investing in either.

Debt funds

Deft 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 almost zero.

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, can definitely 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 short term capital gain

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It is to be noted that debt funds are managed by the highly professional team and that is why one can rest assured that his or her money is in safe hand.

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

Equity funds

Equity funds are the pool of investment, invested the major portion of amounts in the stock market. Because 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 is more than 10 years 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 outweigh and it is proved through historical data.

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.

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Difference between Equity and Debt Fund

Particular Equity Fund Debt Fund
Objective Creation of wealth and capital appreciation, Bringing stability in portfolio with steady generation of income,
Ideal Period of Investment The investment period here should ideally be 10 years or more 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 fund involve high risk of capital loss Debt fund involve less risk and almost zero 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 and it is completely tax-free. Investment in debt fund if sold within 3 years from the date of purchase attracts short term capital gain/loss and taxed at applicable income tax slabs but if sold after 3 years then its long-term capital gain/loss and taxed at 20%

Conclusion

The mutual fund is 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 bring stability and give steady returns. Once can choose any of the funds after considering factors like age, financial goals, returns expectation, risk bearing capacity, the timeframe of investment etc. I hope the Comparison in debt funds and equity funds makes your decision easier while doing your investment.

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