Asset class classification
The difference between the two mainly lies between where your money is getting invested as well as the risk. Debt has a safer risk profile than equity. There is a direct correlation between return and risk, i.e. higher the risk, better the returns.
- Equity Funds
Equity mutual funds make investments in derivaties, securities and company shares that are traded in the stock market. The main objective of these funds is capital appreciation in addition to the dividends that help in providing additional income to the investors. When compared with the debt funds, the equity funds are more volatile. Investors should have a high risk appetite along with a long term investment tenure to get good returns from the same.
- Debt Funds
Debt Funds refer to the investments made in money market and debt instruments. These include government bonds, non convertible debentures, treasury bills and many others. Here, the main objective is to get income from the interest payments. However, there are many debt mutual funds available that help in capital appreciation of the investor. The major difference between a debt and an equity mutual fund is that debt mutual funds are less risk than equity ones. Another distinction between the two lies in the fact that there are different debt funds available in the market with a period ranging from one day to several years.
Debt vs Equity
Let us discuss the difference between the two in terms of different financial variants. This will help you in choosing the one that suits your needs the best.
- Investment nature: Debt funds raise money from the public to invest in various fixed income investments like RBI bonds, government bonds and other securities. Equity funds invest the money raised from the public in stock markets.
- Risk factor: Equity funds invest in the company shares and stocks, resulting in a higher risk factor when compared to debt mutual funds that invest in fixed income investments.
- Returns: Equity funds have a higher probability of good returns than debt funds. However, as discussed earlier, there is also a high probability of negative returns too due to the risks associated with equity funds.
Both equity and debt investments have different characteristics that help in determining their respective behavior. Many people carry this notion that all the mutual fund investments are same and have the same risk factor. By understanding the difference between the two, you will be able to discard this misconception and make an informed and safe investment of your funds. To get further information about the types of mutual funds available in the market, you can contact our financial experts today.