The two funds can be differentiated depending based on several key factors. These differentiating factors can be listed as follows:
- Investments: Equity funds invest mainly in individual stocks with a higher chance of delivering returns and growth. Different stocks are picked according to different investment objectives. For example, there are mid-cap equity funds that invest your funds in various mid-cap stocks with potentially high returns. In comparison, the debt fund instruments invest in safer debt instruments with low differentials in terms of price and interest rate resulting in lower returns.
- Returns: Generally speaking, equity has always generated higher returns than debt mutual funds. This is because any short-term stock market losses are generally covered in the long run. However, there are instances when due to the high market volatility, some of the equity funds have given low or negative returns to the investors, hence the risky nature of the funds.
- Risk: Both equity as well as debt are financial market instruments with a certain degree of correlation between them. However, whenever there is a drop in the market, stock markets tend to suffer more damage than debt funds. This makes debt funds safer than equity funds, albeit with lesser returns.
- Time frame: When compared in a short term time frame, equity funds are more volatile than debt instruments. Their high return potential can only be unlocked after 3-5 years making them best for long-term investments. On the contrary, Debt funds can be chosen for both the short term as well as long term.
- Tax Benefits: When it comes to tax benefits, debt funds are a concern for many. This is because any short-term capital gains under this fund are added to the income of the investor and then accordingly. Equity funds are, however, tax-saving instruments. If the funds are kept for more than a year, all returns accrued from the same are exempted from any taxes till Rs 1,00,000. There is a certain equity fund by the name of ELSS fund that offers tax benefits of around Rs 1,50,000 albeit with a certain lock-in period.
Who should invest?
Investors with long-term investment goals and high-risk tolerance are more suitable for equity funds rather than debt instruments. This is because debt funds are mainly for those risk-averse investors looking to park their funds in a place other than banks and FDs. Many even use debt as a means to park their funds in a liquid or overnight fund, later transferring to an equity fund. Do remember, In order to get the best out of your investment, it is crucial to gain an insight into when to buy and when to sell your mutual fund investments. Ask any further questions that you may have with our financial experts so as to gain complete insight into the money market and make wise investment decisions.