Should you choose debt or equity mutual funds for your investments?

Should you choose debt or equity mutual funds for your investments?

Mutual funds are a better investment tool than conservative schemes like bank fixed deposits and public provident funds. As per historical data, mutual funds like equity funds have outperformed all other conservative investment avenues. For those who don’t know, mutual funds are a pool of professionally managed funds that invest in a diversified portfolio of securities and offer active risk management. Mutual funds have designated fund managers who are responsible for handling the scheme’s portfolio. This is the reason why even investors without any prior investment knowledge can invest in mutual funds according to their risk appetite and expect capital appreciation over the long term. 

The main question a lot of first-time investors face is whether they should be investing in equity funds and debt funds. A lot of mutual fund experts recommend investors keep a diversified investment portfolio. But to understand how to rightly balance your portfolio with both equity and debt, you need to first understand these funds.

What are equity funds?

Equity funds are mutual fund schemes that invest a majority of their assets in equity and equity related instruments of companies that are publicly listed in India. The AMC running equity funds collect money from investors sharing a common investment objective and invest the sum accumulated in a variety of stocks. 

What are debt funds?

While equity funds invest a majority of their investible corpus in equity and equity related instruments of various companies, debt funds are those mutual fund schemes that aim to deliver stable returns with minimum investment risk. Debt funds predominantly invest in corporate and government bonds as well as in money market instruments like commercial papers certificate of deposits, repo rate, CBLO (collateralized borrowing and lending obligation), etc.

Difference between equity and debt funds

CharacteristicsEquity FundsDebt Funds
Investment strategyMoney accumulated from investors is invested across equity and equity related instruments of companies across sectors and industries, sometimes even across foreign marketsMoney accumulated from investors is spread across debt instruments like treasury bills, company fixed deposits, floating rate securities etc.
Nature of the fundMajority of the financial resources accumulated from investors is invest across market cap, sectors/industries, currencies, and foreign securitiesMajority of the financial resources accumulated are spread across fixed income securities and money market instruments
Risk profileSince the investment portfolio of an equity fund is constantly exposed to market volatility, these funds are known to carry a very high risk profileDebt mutual funds are considered to be far safer than equity funds because they do not have any major exposure to equity markets that fluctuate from time to time
ReturnsEquity funds can offer higher returns over the long term as they invest in the stock marketDebt funds are ideally meant to offer stable returns
Ideal forInvestors with a very high risk tolerance can consider investing in equity fundsThose seeking diversification from their equity heavy portfolio or risk averse investors can consider investing in debt funds
Investment horizonOne must need to have a minimum investment horizon of medium to long term in order for the investments to show their true potentialInvestors with a short term investment horizon of 12 months or less, or someone looking to build an emergency fund can consider investing in debt funds

The above differences between equity and debt funds can give investors a clear perspective on which investment option is more ideal for their investment goals. They can even start a SIP in any mutual fund scheme or refer to the SIP calculator to determine the overall returns that they will receive at the end of their mutual fund investment journey.

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