I want to know the difference between equity mutual funds and debt mutual funds. How can I choose between these two types of funds? Which of the two would give me the best returns?Asked
Equity mutual funds invest primarily in stocks of companies whereas debt funds invest in bonds and securities of government,corporates,etc .
Which funds should I choose:
Depending on the risk appetite level and expected returns, investor should select the appropriate type of mutual funds.
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:
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.
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:
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.