In July 2023, Indian financial markets were seen hitting all-time highs. In such a thriving market, the difference between equity and debt mutual funds becomes more pronounced. However, to truly gain you need to know the difference between equity funds and debt funds.

 

Simply said, equity funds invest primarily in shares, bonds, and other securities. Debt funds, on the other hand, invest in government and corporate debt instruments. The rationale behind investing in each of these funds is distinctive and intended to serve specific financial goals.

Brief Guide to Investing in Equity Funds

Equity mutual funds aim to generate high returns, and achieve this across various risk levels. By buying into small, mid, and large market capitalisation funds, you are investing in small, medium and large companies, respectively. 

 

The financial performance of these companies directly influences the returns you earn.

  • How do Equity Funds Work? 

In equity mutual funds, the fund manager allocates at least 60% of the capital in the equity shares of numerous companies. Once the bulk is invested in equity shares, the remaining is funnelled into debt and money market instruments. 

 

This is to safeguard the fund from sudden redemption and risk. Internally, the fund manager actively buys and sells shares, according to market fluctuations. This generates the maximum possible returns for investors.

  • Who are Equity Funds Suitable for?

Equity funds are among the high-risk class of mutual funds. Hence, these are suitable for investors ready to assume high risk for high rewards. 

Brief Guide to Investing in Debt Funds

Debt funds aim to earn their investors a steady interest income and capital appreciation. The maturity period and interest rate are predetermined, earning these the name of ‘fixed-income’ securities. 

  • How do Debt Funds Work?

Investing in a debt mutual fund is like lending money to the issuing entity. A return date and interest rate are promised to the investor. To ensure this promise is met, the fund manager invests in high rated credit instruments. 

 

Few such include government securities, treasury bills, and corporate bonds. A higher credit rating indicates that the security is less volatile. This improves the chances of regular interest payments and principal recovery on maturity. 

  • Who are Debt Funds Suitable for?

Debt fund returns often fall in a predictable range. Hence, these are suitable for investors who prefer to have high liquidity, while earning a stable return at low risk.

Equity Mutual Funds Vs Debt Mutual Funds: A Comparison

Here’s a side-by side comparison to highlight the prime differences between equity and debt mutual funds:

 

Equity Funds

Debt Funds

Investments

Invest in shares of publicly traded companies on the stock market and equity related instruments such as derivatives

Invest in securities generating fixed income. Examples include Treasury bills (T-bills), Commercial Papers (CPs) and Certificates of Deposit (CDs)

Return

High returns in the long term

Low to moderate returns 

Risk

High 

Low to moderate 

Expenses

Active fund management leads to high costs, resulting in high expense ratios

Being less volatile in nature, these funds have lower costs. This implies lower expense ratios, meaning fewer deductions

Investment Horizon

Short, medium or long term depending on your needs. However, these are more profitable in the long term

Short, medium or long term depending on your needs. These are quite liquid, and you can invest in these funds for even a day

Taxation

<12 months: 15% tax on capital gains 

 

>12 months: Capital gains are tax-exempt up to ₹1 Lakh

 

Above ₹1 Lakh: Capital gains are taxed at 10%

Capital gains are taxable as per the investor’s income tax slab rate as of  1st April, 2023

Tax Benefits 

By investing in ELSS funds, you can save up to ₹1.5 Lakh annually

No tax benefits 

Before comparing equity vs. debt mutual funds, assess your risk appetite and the investment timeline. Draw up a financial plan to check if these align with the instrument you want to invest in. 

 

For instance, you may opt for equity mutual funds if you plan to stay invested and maximise gains over the years. 

 

To compare past returns and invest in top-rated mutual funds, visit Bajaj Markets. Invest in the best funds at zero commission, all under one umbrella.

FAQs on Equity Vs Debt Mutual Funds

What is the benefit of investing in equity vs. debt funds?

Equity funds can help fulfil your long-term financial goals, as the corpus grows over time. Whereas, debt funds give you a stable income. These can be used as an investment alternative to fixed deposits and savings bank accounts.

Are debt funds safer than equity funds?

Yes, debt funds are relatively safer than equity funds. 

Is SIP an equity or debt fund?

A Systematic Investment Plan (SIP) is a method of investing a fixed amount systematically for a timeframe. You can choose to invest in either equity or debt funds through SIPs. It is not an investment type, and shouldn’t be confused with one when investing.  

When should I invest in a debt mutual fund?

The best time to invest in a debt mutual fund is when interest rates are falling or are expected to decline. This triggers the value appreciation of the debt funds. 

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