Aug 16, 2017 3 min read

Equity Funds vs. Debt Funds! Which Investment is a Smart Choice?

Don’t forget to consider these points before choosing between equity and debt funds.
Where should I invest? It is a common question asked by many of the new investors who enter the world of mutual funds with little knowledge. Moreover, many existing investors also get confused sometimes between equity and debt category of the funds to invest a surplus amount for greater benefits.

Let’s understand the core concept of both of these fund categories to be able to make a decision that in which category of fund one should invest.

Equity Funds : This group of funds is precisely known for long-term capital appreciation with returns that beat inflation. Equity mutual funds majorly invest the money in the stock of various companies to fetch maximum yields. They are ideal for the long-term investment plans like retirement, child’s education, wealth creation, etc., because the investment horizon to achieve these goals is more than ten years. Although equity funds are comparatively risky than the other investment options, they possess the capacity to provide exceptional profits and appreciation in capital. One must know that this category has provided the real path to the invested capital to grow excellently over the time. Furthermore, it helps the people to invest in the stock of companies without any direct exposure. It means one can enter the stock market with less capital capacity and segregated risk.

Debt Funds : These are managed to provide a secure investment plan in comparison to the equities. They provide a fixed income option to the investors through which they can gain a regular amount of money for meeting financial requirements. Debt mutual funds invest the capital in various securities like government or state government securities, CDs, treasury bills, commercial papers, corporate bonds, and other money market instruments. An individual cannot invest in such securities directly as they are of high value, but fund house can invest in them to attain a safe investment for the investors.

Consider These Points to Decide Between Equity and Debt Funds:

  1. Investment Objectives: One must consider the investment objective before choosing between the debt and the equity mutual funds. If the aim is to generate income, then it is preferable to invest in debt funds. On the other hand, equity funds are known for wealth creation. So, if the investor wants to create wealth for future in the long period of time, they must opt for the equity schemes for their portfolio.
  2. Investment Duration : The time period for which the investor can stay invested must be considered while choosing between the categories. Debt schemes are ideal for the shorter duration of five years or less, whereas equity schemes perform to grow exponentially well in the longer term of investment like ten years or more. Therefore, one must know the tenure for which he/she can stay invested and accordingly choose the plan.
  3. Risk Involved : “Life without risk and struggle, is a life without success,” similarly, to attain successful returns from mutual fund investments one needs to face a certain level of risk. It varies in different plans having varied objectives and categories. Debt funds are usually less risky as compared to equity funds. So, the investor must evaluate his/her risk-taking capacity to choose the most suitable one out of the two.
  4. Tax Applicability : Equity funds are mostly tax efficient when held for more than one year, whereas most of the debt funds generally provide tax benefits after a period of three years. However, the taxability does not make much difference between the categories when invested for more than three years.

It is not a typical job to analyse self requirements and to choose the mutual fund's category accordingly. Still, it is recommended to know the various fundamentals of both the categories to make out differences between them. There is no lack of benefits in both the categories, but choosing the one without matching the objectives or other requirements can lead to a wrong decision.

The above-mentioned points may help you to decide on your investment in equity and debt mutual funds. For more assistance in knowing other aspects of mutual fund investments, read investment tips at MySIPonline.