Differences between Equity and Debt Funds

Differences between Equity and Debt Funds

Last updated: 23 Nov, 2021 | 01:02 pm

Equity vs Debt Funds: Differences between Equity and Debt Funds  | INDmoney

Mutual funds have turned out to be one of the best avenues to invest your money. This has become such that people have started to know and talk more about equity vs debt funds. If you want to invest in mutual funds, you need to have the right set of knowledge and guidance that will help you with the strategies of investing.

Hence, it is important that you know the difference between equity and debt funds. Since investing is all about dividing your funds into different portfolios, you need to know about all kinds of funds and how to go about it. In this article, you will get to know about equity and debt funds, where to invest and the major differences between the same.

What are equity funds?

Since we are talking about the difference between debt and equity funds, it is empirical that we get to know about equity funds. When you are investing in mutual funds, you will see that the fund’s money is invested in certain financial instruments. Well, if these instruments happen to be equity shares and stakes of any listed company on the stock market, the funds are called equity funds.

There are different types of equity funds, depending on the kinds of stocks the fund managers are investing their money in. Some of the noteworthy types are Large Cap, Mid Cap, Small-Cap, Large and Mid Cap, Sectoral funds, etc. Amongst equity and debt funds, equity funds tend to bear the highest risk but also specialize in the highest returns. If you wish to know and invest in these funds, you should check out the INDmoney platform.

What are debt funds?

If you wish to know the difference between equity and debt mutual funds, you should know about debt funds. This is considered to be one of the safest forms of investment that has stable and guaranteed returns. Since the money is invested in government bonds, debentures of listed companies, secured instruments, treasury bills, etc., there is stable income, and the risk is low.

The difference between equity and debt is that when it comes to debt funds, the chances of market fluctuations affecting the fund is negligible. Also, there is guaranteed interest income on these funds, and the same can be reinvested in the funds with compounding.

What are the differences between equity and debt funds?

Since we have covered the different types of funds, let us know more about the difference between equity and debt funds and what the investors would look into while investing:

●  Risk: In debt vs equity fund, the equity fund carries a higher risk than that of debt fund. Since equity funds are directly related to market fluctuations. They carry higher risk. However, since the risks are high, the returns are also high, and they are usually dependent on the performance in the stock market.

●  Taxability: When it comes to equity funds, there are STCG and LTCG. If there are short term gains (less than 12 months), it is taxed at 15%. However, if there is LTCG, there is an exemption up to INR 100000, Mid-Cap and the rest is taxed at 10%. In the case of equity funds vs debt funds, debt funds held less than 36 months are taxed as per income tax slab, whereas LTCG is taxed at 20%.

●  Tax saving option: While both equity and debt funds are not great for saving taxes. You can still choose to invest in an equity fund up to INR 150000 in a year to save taxes.

●  Expenses: There is an expense ratio attached to these funds, and equity and debt funds do not have major differences when it comes to expenses. The industry benchmark lies between 0.5 to 2.5%, and this talks about the professional management of the funds.

●  Timings: The industry fluctuation only plays a role in the case of equity funds. When it comes to debt funds, the security attracts investors, and they prefer debt funds in debt vs equity mutual funds.

Why should one invest in equity and debt funds?

Since we are on the topic of equity vs debt, it is important to know why you should invest in the same. These are some of the reasons:

●  The returns are genuinely higher than that of other forms of financial instruments and securities like fixed deposits, recurring deposits, etc.

●  You can grow your wealth with the click of a few buttons from your home.

●  There are tax saving options when it comes to investments, and you can easily plan your taxes.

How should one invest in equity and debt funds?

There are various ways in which you can invest in these kinds of equity and debt funds. However, if you want the best of funds and also a nice platform to invest your money in, you should look into the INDmoney platform. You can invest in different kinds of stocks, mutual funds, monitor these funds and their performance on a real-time basis. This platform also provides expert advice on the maintenance of portfolios.

Frequently Asked Questions (FAQs):

●  Which is the preferred equity or debt for tax saving option?

When it comes to debt funds, you cannot invest in them to save your taxes. However, if you invest in ELSS mutual funds up to INR 150000 in a year, you can save taxes and plan your taxation.

●  Which is better for the long term?

If you have patience and segregate your portfolio into different types of funds, you will see that equity funds are much better than debt funds in the long run.

●  On what basis mutual funds are categorized into equity and debt?

Mutual funds tend to invest in different kinds of financial instruments in the stock exchange. Hence, equity funds tend to invest in the shares of a listed company whereas debt funds usually invest in bonds and debentures issued by a company.

●  What are equity funds?

In a nutshell, equity funds are defined as those funds that invest in different stocks of companies that are listed on the stock exchange. Based on the size of the stock, the funds are invested by the manager.

●  What are debt funds?

Debt funds are defined as those funds that creatively invest in debt instruments like bonds and debentures, which guarantee returns and an interest income as well.

●  Debt vs Equity fund

Both equity and debt funds tend to behave differently when it comes to investment and return. Where equity funds depend on the growth of the company, debt funds depend on the credit rating. However, if you really wish to play safe, you should invest in debt funds.

●  What are the best Equity and Debt Funds?

Some of the best equity and debt funds are Quant Small Cap Fund, ICICI Prudential Commodities Fund, IDFC Infrastructure Fund, UTI Credit Risk Fund, Franklin India Short Term Income Plan, etc. You can also find more on the INDmoney app.

The Bottom Line

So, with this information in mind, it is high time that you start investing in equity and debt funds. This will help you to grow your wealth and keep your financial future secure. You can always invest from the INDmoney platform and prepare yourself for financial gains.