What is the difference between debt mutual funds and equity mutual funds?

Equity mutual funds invest primarily in stocks of companies whereas debt funds invest in bonds and securities of government,corporates,etc .

Equity mutual funds:

• An equity fund is a fund which invests mainly in stock markets. The major chunk of the fund is invested in stocks of companies.
• Equity funds can be categorized into different types on the basis of market capitalization, sectors, composition of fund, investment objectives, etc.
• Equity funds can provide higher returns to the investors but they come with higher risk exposure. The risk in equity funds depends on the type of equity funds you are investing. 

Debt mutual funds:

• Debt funds are the types of mutual funds which invest capital of investors in bonds and deposits of various kinds and pass on the interest earned in the form of returns to the investors.
• In simple terms, investors lend money and earn interest (returns) on the money they have lent.
• Advantages of debt funds are low cost structure, stable returns, high returns and they score high on safety. They are less volatile and hence less risky than equity funds.
• Investment in debt funds is ideal for investors who want regular income and risk averse.

Which funds should I choose:

Depending on the risk appetite level and expected returns, investor should select the appropriate type of mutual funds.

• Equity funds are one of the financial instruments which can give you high inflation beating returns. When the stocks ‘price rises, it reflects in the value of your investment. By investing in these funds, one can accumulate good amount of wealth over a period of time.
• Investment in debt funds is ideal for investors who want regular income and risk averse. Therefore, debt funds can be a great medium for investors to achieve their financial goals if they do not want to bear the equity risk

The basic difference between debt mutual funds and equity mutual funds is the investment destination.

Debt mutual funds invest a large proportion (at least 65%) of the total money collected from investors into fixed income securities like Corporate Bonds, Government Bonds, Bonds issued by banks, Treasury Bills, etc. You can read more about the types of debt funds available here. These funds are better suited to investors who do not want to participate in the market volatility as these instruments are uncorrelated with the stock market performance. Investors in debt oriented funds also seek regular and stable returns or want to achieve some financial goal like buying a house, or paying for their child's education at a certain point of time in the future. Such investments are generally made for short to medium term.

Equity mutual funds are more suited to investors who are not risk averse and are looking for medium to long term investments. It enables the investors to benefit out of the volatile nature of market. Unlike debt funds, equity funds do not have a predefined maturity date and can be redeemed upon the request of the investor. Absence of lock-in period adds to the liquid nature of the fund. In India, mutual fund returns have outperformed returns generated by stock market indices. It also allows the investor to take advantage of the expertise and knowledge of the fund manager as most funds are actively managed. Depending upon your risk appetite, you may choose to invest in small cap, mid cap or large cap companies.

Thus, you can choose to invest in debt mutual funds or equity mutual funds depending upon your financial objective - whether it is capital appreciation or regular income, investment horizon and risk bearing capacity. If you are still unsure of where to invest, you may look at hybrid fund which essentially invests in debt and equity both; as well as Systematic Transfer Plan (STP).

Hope this answers your question.

A mutual fund is an investment instrument, basically collection of stocks and/or bonds, managed by professionals of an asset management company. Investors will put their money in different types of mutual fund units depending on their risk appetite and duration of investment.

There are different 2 major types of mutual funds in India:

1. Equity mutual funds

2. Debt mutual funds

Major difference between these two types of mutual funds are:

Choosing a fund for investment, all depends on your investment goals. Debt funds are best suited for investors with surplus amount of money lying idle with them and interested in earning better returns than normal saving accounts or bank FDs with very low risk appetite risk. But if higher return there are several option available in equity funds which suits your risk appetite.

Happy Investing!

A debt fund is a pool of investment that invests mainly in a mix of debt or fixed income securities like treasury bills, corporate bonds, government securities, etc. 

An equity mutual fund is one which invests solely in stocks of various companies. Equity mutual funds are of three types- large, mid and small cap funds.

The main differences between debt funds and equity funds are:

• Nature- Debt funds invest in bonds, corporate deposits, etc., while equity funds invest in stocks and shares of companies.
• Taxability- There are different treatments for short term and long term capital gains:

1. STCG-Debt funds held for less than 3 years are taxed at slab rates, while equity funds held for less than 3 years are taxed at 15%.
2. LTCG- Debt funds held for more than 3 years are taxed at 20% while equity funds held more than 3 years are exempt from tax.

• Risk- Debt funds carry lower amount of risk as compared to equity funds.
• Returns- Debt funds offer low returns as compared to equity returns.

In order to decide which of these two would be better for you, analyse the funds as per your portfolio requirements on the basis of above mentioned parameters.