Mutual funds bring multiple investment solutions for various financial goals, risk appetites and tenures. Before choosing a particular type of mutual fund, you must assess its risk against expected returns from it.
You need to take a higher risk to earn greater returns. In that case, you must stay invested for a long period in the chosen fund.
Before investing in a suitable fund, learn what is SIP. Through a Systematic Investment Plan (SIP), you can invest a small amount regularly in a fund, beat inflation through rupee cost averaging and enjoy good long-term returns.
Equity and debt funds are both popular types of mutual funds. To help decide which one to invest in, go through their comparison below.
Equity Funds
They essentially invest in equities or equity-related avenues, such as derivatives. These trade in the stock market. Capital appreciation is the main objective of investing in stocks. Plus you can earn income through dividends from stocks.
There are various types of equity mutual funds, primarily based on market capitalisation. These are small-cap, mid-cap and large-cap funds. Small-caps mainly invest in 251st largest and onward companies. Mid-caps invest mostly in the 101st to 250th largest companies. Large-caps invest mainly in the 100 leading companies.
Debt Funds
They invest predominantly in money market instruments, government securities, corporate bonds, non-convertible debentures, Treasury bills, certificates of deposits, commercial papers, etc. The major objective of investing in these funds is earning income through interest payments and sometimes, generating capital appreciation too.
Different types of debt mutual funds are there which allow you to invest in 1 day to several years. Overnight funds put your money in instruments maturing overnight without interest risks. Liquid funds invest in securities that mature before 91 days. The duration of low-duration and ultra-short funds is 3-12 months. They have a low-to-moderately-low risk. Short-duration funds mature in 1-3 years and have moderate risks. Gilt, long-duration and medium-to-long-duration funds have highly sensitive interest rates and their duration is 4-7 years.
Differences Between the Two Types of Mutual Funds: Equity and Debt
| Features | Equity Funds | Debt Funds |
| Returns | Much higher returns than debt funds in the long run | Low-to-moderate returns compared to equities |
| Risk appetite | Moderately high to high | Low to moderate |
| Expenses | Higher expense ratio than debt funds | Lower expense ratio than equities |
| Timing | Timings of buying/selling are significant since the stock market can be highly volatile sometimes and is highly dynamic. | Investment duration is more important than timings of buying/selling. |
| Taxation | Capital gains for funds held for below 12 years are taxable at 15%. Long-term capital gains aren’t taxed up to ₹1,00,000 but taxed at 10% after this limit. | Funds held below 36 months are taxable according to your income tax rate. After allowing for indexation, long-term gains are taxable at 20%. |
| Tax Benefits | No tax-saving option. | With an investment of up to ₹1,50,000 in a year, you can save taxes. |
To conclude, if you want high returns or have a moderately high or a high risk appetite, you can opt for equity funds over debts. Ensure to complete your KYC registration before beginning to invest.
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