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What should new investors choose? Equity or debt funds?

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If you are considering a mutual fund investment, please remember that mutual funds are not a monolith. The different types of mutual funds are equity, debt, hybrid funds, and many more. The most common are debt and equity funds. New investors are usually bewildered about choosing the suitable one between these two variants. Let’s look at these two funds below:

Equity funds

An equity fund allocates the pooled corpus to the stocks and shares of different companies. An equity fund investment allocates over 65% of the portfolio to equities and related instruments. This mutual fund aims for higher returns over the long term. They try to do so by investing in a mix of large-, mid-, and small-cap stocks.

Debt funds

Debt funds focus on investing in debt or fixed-income instruments. These instruments include bonds, government securities, debentures, treasury bills, commercial papers, certificates of deposits, and many more. Debt mutual funds aim to generate relatively stable returns with the help of a diverse portfolio consisting of fixed-income securities.

What are the benefits of equity funds?

Here are a few advantages associated with an equity fund investment:

  • Invest in equity funds if you want to enjoy high returns
  • They come with a diversified mutual fund portfolio. As stated before, equity funds are categorised into large-, mid-, and small-cap funds. These categories come with different benefits and varying levels of risks
  • You need not invest in equity funds manually. The fund manager will invest on your behalf. Selecting stocks requires expertise, which fund managers have. The fund managers’ track records are accessible in the public domain

What are the benefits of debt funds?

Here are the advantages associated with debt fund investments:

  • Debt funds suit investors with low to moderate-risk appetites
  • As they invest in debt securities, they offer returns regularly
  • These funds are affordable. Their expense ratio isn’t that high

Equity vs debt funds

Features Debt mutual funds Equity mutual funds
Instruments These funds invest in money market instruments, corporate bonds, certificates of deposits (CDs), non – convertible debentures (NCDs), commercial papers (CPs), Treasury bills (T-Bills), and Government securities (G-Secs) and many more Equities or equity-related instruments are targets of investment for these funds
Return on investments ROI is low or moderate Provide higher returns in the long term
Risk appetite These funds come with low to moderate investment risks Equity funds have moderately high to higher investment risks
Expenses The expense ratio of debt mutual funds is lower The expense ratio of equity funds is comparatively higher
Timings The duration of investment is more important Timing is very important as the stock market is very dynamic, and sometimes, even volatile
Suitability Suitable for short to mid-term financial goals Ideal for long-term high-risk appetite investors
Tax saving option No options are available for saving taxes ELSS schemes can help you save on taxes

Conclusion

Debt and equity funds are two different investment options. Debt and an equity mutual fund differ in terms of financial instruments, risk tolerance, and return on investments. However, it is important to note that both of these variants have different advantages and risk levels. So, determine your risk appetite before choosing between equity and debt funds.

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