Debt or Equity schemes. Which one is better?
Sarita Kothari13 March, 2019
Which one is better jeans or trousers? Answer to this question will vary from person to person. In the same way, both the type of mutual funds have separate fan base. According to the time horizon, risk appetite, and expected returns, both of them have their own pros and cons. If you have a long time horizon, considerable high risk appetite, and want good capital gains in the future then you should invest in the equity funds. On the other hand, if you have short time horizon, low risk appetite, and want descent returns then debt funds can help you in achieving the goal.
Tirumala Nagarajan28 February, 2019
Let’s first see the difference between the two-
Debt Funds- It is the type of mutual fund that invests in the fixed income securities, such as treasury bills, bonds, etc. When an organization or an entity want to raise fund, they ask the investors to pool their cash in the mutual fund and promise them regular and steady interest rate.
Equity Funds- Also known as stock market fund, these mutual funds invests in the stock market of large cap, mid cap, and small cap companies based on the market capitalization. These funds also diversify the assets in debts instruments or money instruments other than investing in the equity market.
Now let’s compare the two on the basis on risk and returns-
Risk- Risk is something that comes free along with mutual funds however, the magnitude varies from fund to fund.
Equity Funds- As I said earlier, they invest in the stock market and this makes them more riskier than the debt funds. Market volatility depends on several factors like inflation rates, fluctuation of currency rates, changes in government policies, etc., and any changes in the market condition will clearly affect the NAV of your fund.
Debt Funds- Less risky than equity funds as they invest in the government and corporate bands. One one hand, government bonds are risk free, and on the other hand, corporate bonds are slightly risky but the risk can be eliminated by checking the past performance and rating of the organization.
Returns- High risk brings home high returns. And, this is clearly depicted in the risk-adjusted returns of equity funds and debt funds.
Equity Funds- They can provide returns of up to 14%-18%.
Debt Funds- Returns of around 8% can be provided by such funds.
I hope that my answer will help you in understanding the difference between the two.
Have a safe & happy investment journey!