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How Equity Fund Is Different From Debt Fund? Which One Should You Invest

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Everyone is familiar with Mutual funds. Mutua funds are good to invest. The returns are good compared to what banks offer. If you are a salaried person it might be a good investment destination for you as you can start a simple SIP (Systematic Investment Plan) with just Rs 500. However, investing in mutual funds comes with risks. All the risks in mutual fund investments are subject to market risk.

 

When a first-time investor with minimal understanding of mutual funds begins to invest, he or she learns that mutual funds are more than simply simple mutual funds. When consumers realize that all mutual funds are the same, the misperception is dispelled. There are several sorts of funds, the most common of which are equity and debt funds.

Where the money is invested is the distinction between the two. Equity funds engage primarily in equity shares and associated securities, whereas debt funds invest in fixed income instruments. The features of both equities and fixed income instruments dictate how the respective schemes will behave. Diverse investors invest in these funds based on their own demands. It's always beneficial to understand the differences and what your ROI expectations are.

Putting it in simple words, Equity is a product to generate wealth, whereas, Debt is a product to protect wealth.

Equity Funds

Equity Funds

A mutual fund scheme that invests primarily in company shares/stocks is known as an equity fund. Growth Funds are another name for them. You have two choices when it comes to investing in shares. One option is to buy and sell stocks directly, while the other is to invest in equity mutual funds.

Equity Funds are either Active or Passive.

Active Fund - A fund manager scours the stock market, does company research, analyses performance, and seeks out the finest stocks to invest in.

Passive Fund - The fund manager constructs a portfolio that closely resembles a well-known market index, such as the Sensex or the Nifty Fifty.

Furthermore, Market Capitalisation, or how much the capital market values an entire company's stock, may be used to split Equity Funds. Funds can be classified as Large-Cap, Mid-Cap, Small- Cap, or Micro-Cap.

An equity fund essentially invests in company shares and aims to provide the benefit of professional management and diversification to ordinary investors.

Advantages of Equity Funds

  • Diversification
  • Risk Mitigation
  • Convenience
  • Professional Fund Management
Debt Funds
 

Debt Funds

A debt fund is also a Mutual Fund scheme, but it is quite different from the Equity Fund. Debt funds invest in fixed income instruments that offer capital appreciation, such as corporate debt securities, corporate and government bonds, and money market instruments. Fixed Income Funds or Bond Funds are other names for debt funds. In the eyes of the investor, the nature of investing makes it a wealth protection fund.

Advantages of Debt Funds

  • Low-cost structure
  • Stable returns
  • High liquidity
  • Safety

Debt funds are great for investors who want a steady stream of income but don't want to take any risks that come with investing in Equity Funds. However, Debt funds also involve risk, but it is less risky compared to Equity Funds.

Debt Mutual Funds would be a good alternative to save investments such as Bank Deposits. If you have been investing in traditional fixed income products and looking for alternative regular returns investment destination with little volatility, Debt Funds could be a good choice.

Debt Funds help you reach your financial objectives in a more tax-effective manner and hence earn greater returns.

Debt funds operate similarly to other Mutual Fund schemes in terms of operation. They do, however, outperform equities mutual funds in terms of capital safety.

Bottom Line

Bottom Line

Long-term aims are best served by equity funds, whereas short- to medium-term ones are best served by debt funds. Your risk appetite must also be addressed, but if you are young, equities funds are the best option.

To keep up with inflation, retirees and elderly citizens require exposure to equity funds as well, although at a lesser level than younger people. There are several aspects to consider before choosing which mutual fund category to invest in.

Story first published: Friday, December 24, 2021, 19:23 [IST]
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