Navigating the investment scene can be daunting, especially when it comes to understanding equity and debt mutual funds. These two types of funds are quite different, with one focused on investing in shares and other securities, while the other is centered around fixed-income instruments such as bonds.
This blog aims to clear up any confusion by explaining these key differences in a straightforward manner. Get ready to dive into an enlightening journey that will equip you with knowledge and insight for your next investment decision!
Key Takeaways
- Equity funds put money in stocks. They are risky but can bring high returns.
- Debt funds invest in things like bonds and give regular interest. They are less risky than equity funds.
- To pick the right fund, think about your risk level, how soon you need your money back, and what kind of return you want.
- A good mix of both fund types can help balance out risks and rewards.
Synopsis
Asset class classification
This section offers an in-depth understanding of equity and debt mutual funds, exploring their characteristics, risks and potential returns.
Understanding Equity Vs Debt Mutual Funds
Equity mutual funds put money in shares, bonds, and other things of value. These funds can earn a lot when the stock market does well. But, they can also lose lots if the market goes down.
On the other hand, debt mutual funds like to invest in fixed income assets. Often this means loans or bonds that pay regular interest.
Both types are good for saving on taxes. So when we compare equity and debt mutual funds, there is no clear winner or loser. The choice depends on what you want from your money and how much risk you can handle.
What are Equity Funds?
Equity funds are a type of mutual fund. They put money in stocks. More than 65% of their total assets go to stocks. This makes equity funds high-risk funds. But they also have the chance for high returns.
These funds can give you capital appreciation and growth potential. There are different kinds of equity funds, like stock funds and dividend funds. The main focus of these is on equities or shares.
In India, they mostly invest in shares too.
What are Debt funds?
Debt funds are a type of mutual fund that put your money in bonds and other fixed income instruments. They aim to earn returns through the interest from these assets. Debt funds have lower risks than equity funds because they invest mostly in securities with set return rates.
These types of investments can include things like corporate bonds, government bonds, and treasury bills among other items. As one of the largest kinds of mutual funds, debt funds come in 14 different sub-categories for investors to choose from.
Many find them very helpful when looking to balance risk in their investment portfolio.
Key difference between equity mutual fund and debt mutual fund
Equity vs debt mutual funds differ primarily in the type of assets they invest in, their risk profile, potential returns, and suitability for different types of investors. Here’s a quick comparison between equity mutual funds and debt mutual funds:
Equity Mutual Funds | Debt Mutual Funds | |
---|---|---|
Type of Assets | Invest primarily in stocks and equity-related instruments. | Invest primarily in fixed income securities such as government and corporate bonds. |
Risk Profile | High-risk, high-reward investments, with potential for substantial fluctuations in returns. | Low-risk investments, providing more stable returns. |
Potential Returns | Can provide higher long-term returns, influenced by factors such as market conditions and company performance. | Provide regular income through interest payments, driven by interest rates and credit quality of underlying bonds. |
Suitable For | Investors with higher risk tolerance and longer investment horizon. | Investors seeking regular income and capital preservation. |
These differences highlight the importance of understanding your own risk tolerance, investment goals, and market conditions before choosing to invest in either equity mutual funds or debt mutual funds.
Do you want to understand the structure of Mutual Fund in India and how it works?, Please check out.
Factors to Consider Before Investing in Equity Funds
Investing in equity funds requires careful consideration of several factors including your risk appetite, the expense ratio of the fund, quality of the fund manager and size of the fund.
Explore these key aspects further to make an informed investment decision.
Risk Appetite
Risk appetite plays a big role in picking equity funds. It tells how much risk you can take to grow your money. If you can handle more risk, equity funds might be a good pick for you.
Those with a strong risk tolerance do well with equity funds. These funds aim for long-term gains and need time to reach their full potential. But keep in mind; high return means high risk too! If this sounds like your style, then consider adding these types of funds into your portfolio.
Expense Ratio
The Expense Ratio is a fee you pay. It covers all costs of managing the fund. This includes operational costs, administrative expenses and management fees. These fees are part of your fund’s assets.
They can be high or low. The expense ratio tells you how much it costs to manage your investment in the mutual fund before any reimbursements. High fees can lower your returns if not understood right.
Look out for Exit loads in mutual funds as well while planning to invest in mutual funds.
Fund Manager
A fund manager is key in taking care of your money. They decide where to put it, so you can get more. They study a lotabout the best places to invest. A good Fund Manager has a long record of doing well in this job.
Their skills and choices have a big effect on how much money you might make from debt or equity funds. You should always check their past work before choosing an equity or debt mutual fund to put your money into.
Also, keep looking at what they do for better results with your cash.
Size Of The Fund
The size of the fund tells us how much money is in it. It can change based on what the fund invests in. Big funds may have more investors and assets under management. The size also affects how easy it is to buy or sell things in the fund.
You should look at a fund’s size before you put your money in, especially if you think about your investment goals and risk level. Checking the size of a fund is very important before making any choices.
Factors to Consider Before Investing in Debt Funds
Before you decide to invest in debt funds, consider the maturity date of the fund. Look closely at its scheme portfolio to understand the kind of securities it contains. Evaluate management fees, as these can chip away at your returns over time.
Finally, assess the credit quality of a debt fund and how its portfolio is composed with respect to different risk grades like AA, A or BBB before making an investment decision.
Maturity
Maturity talks about when debt funds will pay back your money. It is like a due date for a loan. Some debt funds have a short maturity period of one year or less. These are called money market funds.
Other debt funds can have a longer maturity period of up to three years. Taking note of the maturity period helps you plan when you will get back your invested cash from the fund.
Scheme Portfolio
The scheme portfolio matters a lot in debt funds. It shows what the fund has bought with your money. A good look at it tells you about the risk and returns of the fund. For instance, a fund investing in high-rated bonds is safer but gives less return.
On the other hand, one that invests in low-rated bonds bears more risk but also has the chance for high returns. So, pick a debt mutual fund that matches your own risk appetite and goal needs without any rush or haste.
Management Fee
The management fee is a key point to think about before investing in debt funds. This fee pays for the work done by the fund manager. It is part of the cost structure in debt funds and adds to your overall expenses.
Debt funds often have higher fees than equity funds due to more tasks such as risk management. The expense ratio can make a big change in your profits, so it’s good to aim for lower fees when you pick a debt fund.
Look out for lockin period in mutual funds before deciding on the type of mutual funds you are planning to invest.
Credit Quality
Credit quality is a big part of picking debt funds. It tells you how safe the fund’s bonds are. Safe bonds have less chance of not paying back money. Bonds with high credit quality are given good ratings by groups like Fitch, Moody’s and S&P.
These ratings can help you choose which debt funds to buy.
Debt funds also come with some risk, just like other investments do. The fund could lose money if a company or government it lent to cannot pay back its loan (default risk). Investors must look at factsheets for details on the credit quality of a debt fund before buying it.
Deep comparitive Analysis: Equity Fund vs Debt Fund
Equity funds and debt funds each have their own benefits and risks. It’s important to understand the differences between these two types of mutual funds before making an investment decision.
Parameter | Equity Funds | Debt Funds |
---|---|---|
Risk Profile | Equity funds have a higher risk profile compared to debt funds. They are suitable for investors willing to accept a higher level of volatility for potentially higher returns. | Debt funds have a lower risk profile. They are suitable for investors looking for a stable income with comparatively less risk. |
Investment Type | Equity funds invest predominantly in shares or stocks of companies. | Debt funds invest in fixed-income securities like bonds and treasury bills. |
Return Potential | Equity funds have the potential for higher returns, but they also have higher volatility due to market fluctuations. | Debt funds offer more stable returns. They generate steady interest income and can provide capital appreciation. |
Risk & Return Category | Equity funds fall under the high risk-high return investment category. | Debt funds carry relatively low risks, hence they come under the low risk-low return category. |
Tax Efficiency | Equity funds are tax-efficient investment options. They can offer tax benefits, depending on the region and the duration of investment. | Like equity funds, debt funds are also tax-efficient investment options. |
Each investor’s circumstances and goals are unique, so it’s vital to choose the fund that aligns with your investment strategy and goals.
Building Your Investment Portfolio with Equity and Debt Mutual Funds
Diversifying funds is a key step in building your investment portfolio. Here’s how to do it:
- Start by picking equity mutual funds. These offer high returns. They can grow your money more than other investments.
- Add debt mutual funds into the mix. They put money in fixed income assets. This causes less risk, so it helps balance out the risky equity funds.
- Choose the right blend of equity and debt funds based on your own risk profile.
- Use both kinds of mutual funds together for diversification.
- Look for specific types of equity and debt mutual funds in India that will fit nicely into your portfolio.
- Remember that all these fund types are tax – efficient ways to invest.
Choosing Between Equity and Debt Funds
Deciphering between equity and debt funds can be simplified by understanding your risk appetite, market conditions, and the importance of diversification. Stay tuned for comprehensive insights to help you make an informed investment decision.
Risk appetite and investment goals
Knowing your risk appetite is key. This means how much loss you can take before selling. If you hate losing money, debt funds may be good for you. They are less risky than equity funds.
Your investment goals matter too. You should pick a fund that suits what you want to achieve. If growing your money over the long term is your goal, think about equity funds. But if you need steady income now, look at debt funds.
Market conditions
Market conditions play a big part in picking between equity and debt funds. These conditions include things like how the stock market is doing or what interest rates are. If the stock market is up, equity funds might be your best bet.
But if it’s down, you may want to go with debt funds instead. The bond market is also important in this choice. It can affect debt fund returns a lot. Plus, there might be more risk if the company owing money (credit risk) has problems paying back its loans.
Diversification
Diversification is key in picking between equity and debt funds. It takes your money and puts it in different places. This way, you spread the risk around. You don’t lose all your money if one part goes bad.
Equity funds let you buy shares from many sectors of the economy. Debt funds invest in many types of bonds which need constant checking to stay safe. So, diversification helps manage risk while aiming for growth or income from your investments.
Top Performing Funds
This section will delve into the top-performing funds in various categories such as equity, debt, hybrid, and tax saver funds, providing an analysis of their performance to help you make informed investment decisions.
Equity
Equity funds aim to make money by buying stocks. They buy pieces of companies. This can be small, medium or big companies. The size you choose depends on the type of equity fund you pick.
Some people think that equity funds are risky. That is true, but they can also give you a lot of profit if you wait long enough. If your fund manager makes good choices, your investment could grow in value over time.
Equity funds have different types like growth and value funds, sector and index funds, international and dividend ones too! You may even find top performing funds among these categories.
Stock market conditions affect how much your investments will earn at any given moment.
Below are some of the top performing Equity Funds at their respective space. This is purely for education purpose and not for any investment advice.
Large Cap Funds | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Canara Robeco Bluechip Equity Fund Direct Plan Growth | 16.80% | 17.20% | 18% |
DSP Nifty 50 Equal Weight Index Fund Direct Growth | 22.20% | 22.70% | 17.30% |
ICICI Prudential Bluechip Fund Direct Plan Growth | 21.30% | 21.20% | 17.30% |
Mid Cap Funds | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Quant Mid Cap Fund Growth Option Direct Plan | 28.50% | 36.50% | 28.50% |
PGIM India Midcap Opportunities Fund Direct Growth | 15.90% | 27.70% | 26.40% |
Motilal Oswal Midcap Fund – Direct Growth | 32.90% | 36.30% | 25.40% |
Small Cap Funds | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Quant Small Cap Fund Growth Option Direct Plan | 39.80% | 45.20% | 32.80% |
Nippon India Small Cap Fund – Direct Plan – Growth Plan | 41.60% | 41.80% | 29% |
Axis Small Cap Fund Direct Growth | 29.40% | 31.70% | 27.60% |
Debt
Debt funds put money in bonds and other debt. These funds give a steady income over time. They are not as risky as equity funds, but they can also bring less profit. Debt funds put most of their money in places like treasury securitiesand loans that pay interest.
The cash you get from these is called a coupon payment. But there is still some risk with debt funds. If the company or country can’t pay back its loan, we call this default risk. People think about yield, duration and credit rating before choosing a fund to use their money best way possible.
Below are some of the top performing Debt Funds at their respective space. This is purely for education purpose and not an investment advice.
Liquid Funds | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Quant Liquid Fund Direct Plan – Growth | 6.90% | 5.40% | 5.80% |
PGIM India Liquid Fund Direct Plan Growth | 7.10% | 5.10% | 5.30% |
Canara Robeco Liquid Fund Direct Growth | 7.10% | 5% | 5.10% |
Money Market | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Edelweiss Money Market Fund Direct Plan Growth Option | 7.20% | 5% | 7.20% |
HDFC Money Market Fund – Direct Plan – Growth | 7.50% | 5.40% | 6.30% |
Franklin India Money Market Fund Direct Growth | 7.40% | 5.20% | 6.10% |
* ideally Money market instrument funds are suitable for an Investment Horizon between 6 months to 12 months and can expect a Risk Free Returns of 3% – 4%.
Hybrid
Hybrid funds are a kind of mutual fund. They have stocks and bonds in one pack. This mix gives you growth from stocks and income from bonds. You need to know two types of hybrid funds, though.
One is equity-oriented, which means it has more stocks than bonds. The other is debt-oriented, with more bonds than stocks in it. Hybrid funds help spread the risk over both kinds of assets: stocks and bonds.
So they can be a good way to diversify your investment portfolio if you want less risk.
Below are some of the top performing Hybrid Funds at their respective space. This is purely for education purpose and not an investment advice.
Conservative | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Kotak Debt Hybrid Fund – Direct Plan – Growth | 12.90% | 11.60% | 12.50% |
Canara Robeco Conservative Hybrid Fund Direct Plan Growth Option | 9.20% | 8.70% | 10.40% |
SBI Conservative Hybrid Fund Direct Plan Growth | 10.70% | 10.70% | 11% |
* These Conservative funds focus mainly on Fixed instruments and their exposure to equities would be less with a maximum exposure of up to 25%. These funds will give Stable Returns with Low Risk and estimated return would be somewhere between 8% – 10%.
Aggressive | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Quant Absolute Fund Growth Option Direct Plan | 9.90% | 25.20% | 23.10% |
Bank of India Mid & Small Cap Equity & Debt Fund Direct Growth | 30.50% | 27.30% | 20.80% |
ICICI Prudential Equity & Debt Fund Direct Plan Growth | 23.70% | 26.40% | 19.70% |
Balanced | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
HDFC Balanced Advantage Fund Direct Plan Growth Option | 26.50% | 25.30% | 18.50% |
Baroda BNP Paribas Balanced Advantage Fund Direct Growth | 17.20% | 14.20% | 16.20% |
Edelweiss Balanced Advantage Fund Direct Plan Growth | 14.90% | 14.10% | 14.80% |
Multi Asset | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Quant Multi Asset Fund Growth Option Direct Plan | 17.70% | 29.30% | 24.80% |
ICICI Prudential Multi-Asset Fund Direct Plan Growth | 22% | 25.30% | 19.40% |
HDFC Multi-Asset Fund – Direct Plan – Growth Option | 15.50% | 15.70% | 15% |
Tax saver
You can save money on income tax with ELSS mutual funds. This type of fund is special under the Income Tax Act. You can invest up to Rs 150,000 in a year and get a break on your taxes.
Other options in Section 80C do not give you this same benefit. This makes ELSS funds good for saving taxes, as well as growing your wealth through smart investing plans. Find out about top-performing tax-saver funds before you decide where to put your money.
Below are some of the top performing Tax Saver Funds. This is purely for education purpose and not an investment advice.
Tax Saver | |||
Fund Name | 1-Year Return % | 3-Year Return % | 5-Year Return % |
Quant Tax Plan Direct Plan – Growth | 20.30% | 34.50% | 30% |
Bank of India Tax Advantage Fund Direct Plan Growth | 28.60% | 25.10% | 24% |
Bandhan ELSS Tax Saver Fund – Direct Plan – Growth | 23.10% | 27% | 20.20% |
SBI Long Term Equity Fund Direct Growth | 30.90% | 25.50% | 19.50% |
Motilal Oswal ELSS Tax Saver Fund Direct Plan Growth | 29.50% | 24.10% | 18.50% |
* Main thing to note in the Tax Saver Mutual funds is that the fund have a lock in period of 3 years. Investing in ELSS – Tax Saver Funds to qualify for Tax Deductions of upto ₹ 1.5 lakhs per year. Usually, these funds are considered as a Growth with Tax Savings options and would yield somewhere between 18% – 24%.
Conclusion
Investing in equity and debt mutual funds can be a strong move. Equity funds may offer more growth, but they also come with more risk. Debt funds might be safer, but the profits are often lower.
In the end, it all boils down to what suits your needs and goals best.
Disclaimer: Nothing in this article is advising anyone to invest in what ever fund we suggest. It is purely for educational purpose and a demo based on funds performance in the past years. Please understand the article and do your investment on your own risk or consult an authorised professional to get your investment portfolio set or reviewed based on your needs.
FAQs
1. What are equity mutual funds?
Equity mutual funds are pools of money invested in company stocks.
2. What are debt mutual funds?
Debt mutual funds are investment pools that put money into bonds and other types of fixed-income securities.
3. How is an equity fund different from a debt fund?
The main difference lies in their investments: equity funds invest in stocks while debt funds invest in bonds and other fixed-income securities.
4. Which is safer, an equity fund or a debt fund?
Typically, debt funds are considered safer than equity funds as they provide stable returns over time.
5. Can I have both equity and debt mutual funds?
Yes, you can invest in both to balance risk and return based on your financial goals.