Difference Between Equity Fund And Debt Fund
Published On Aug 26, 2021 12:00 PM By InsuranceDekho
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A lot of individuals believe that all mutual funds are the same. There are several sorts of funds, the most common of which are equity and debt funds. The place where the money is invested is the distinction between the two. Equity funds invest primarily in equity shares and related securities, whereas debt funds invest mostly in fixed income instruments. The characteristics of both equities and fixed income instruments determine how the respective schemes will behave. Let's learn about the various aspects of mutual funds' type and what makes them different from each other.
What is an Equity Mutual Fund?
Equity funds invest largely in company stock and related instruments that trade on the stock exchange. The fundamental goal of stock investing is capital growth, but stocks may also pay dividends, which provide income to investors. For equity fund investments, investors must have a moderately high to high-risk appetite, as well as lengthier investment tenures. Stocks make about 60-65 per cent of an equity fund's portfolio. To offset the risks, the rest of the portfolio could be made up of debt and money market instruments. In order to make money, a fund manager chooses which stocks to buy and sell.
What is a Debt Mutual Fund?
Debt funds generally invest in debt and money market securities. Investing in debt or money market instruments is primarily for the purpose of receiving income in the form of interest payments. Although the primary goal of debt funds is to create income, some debt funds that take interest rate calls can also provide capital appreciation to investors. Debt funds offer short and long-term investment alternatives based on portfolio maturity. Low volatility can be found in debt funds such as liquid funds or extremely short term funds that mature in a short period of time. Other debt funds with longer maturities, on the other hand, maybe more volatile. Debt funds, all in all, are less risky and volatile than equity funds, and they can provide returns of 6 to 8%.
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What is the Difference Between Equity Fund And Debt Fund?
Here is a detailed comparison between equity mutual funds and debt funds.
- Investment - Individual stocks with a higher probability of expanding and producing returns are the focus of equity funds. Stock selection is made in order to meet the investing goal. Debt funds, on the other hand, typically invest in bonds and other debt instruments that yield low returns due to low price differentials or average interest rates.
- Returns - Equity funds have historically outperformed debt funds in terms of returns.
- Risk Appetite - Equity and debt are market-linked instruments with a degree of correlation. When the market crashes, however, share prices are known to decrease faster than debt securities. As a result, debt funds are more secure than equity funds. Furthermore, the safest mutual funds in India are overnight funds, liquid funds, and extremely short term funds.
- Time Duration - Equity funds are notorious for being volatile in the short term, but they have the potential to produce substantial returns over a period of three to five years. Hence, long-term investors might choose equity funds. Debt funds are appropriate for both short and long-term investments. Simply put, the longer the investment horizon, the longer the portfolio maturity.
- Tax Benefits - There is no option to save taxes in debt funds; however, equity funds can help you save tax. Moreover, ELSS funds, a type of equity fund, can offer tax benefits of up to ₹1,50,000 with a 3-year lock-in period.
While equity funds are riskier in the near term, they can deliver a better long-term return than any other asset type if you are willing to assume a significant risk. Debt funds can be an excellent companion if you can't handle excessive risk and are content with a low to moderate return, and your primary goal is to protect your wealth.Both assist individuals in attaining their varied investment objectives based on the investor's risk appetite and investment objective. Those who are unsure how to evaluate equity and debt mutual funds can even get advice from a financial professional before making an investment decision.
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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.