Equity and Debt funds

 

What are Debt Funds?

Debt funds are the pool of investments that are invested in highly rated fixed-income earning securities like central and state government bonds, treasury bills, and other money market instruments. It is to be noted that debt funds are investing into fixed income earning instruments and hence the risk is quite less.

Debt funds are good for shorter investment horizons like 3 to 5 years.

When the units purchased in a debt fund are sold within three years, then the income will be taxed considering short-term capital gains. Any sale of units of a debt fund held for more than 3 years is treated as long-term capital gains for tax purposes.

Debt funds are managed by an experienced team of fund managers, hence the investment in debt funds is considered safe.

Debt funds are highly liquid and one can get money back within a day’s time. There can be an incidence of exit load for the withdrawal of the amount within a stipulated time frame.

What are Equity Funds?

The majority of funds are invested in the stock market through equity funds, which are a type of investment vehicle. Equity funds carry inherent risk because they invest directly in the stock market. Equity funds are primarily used for capital growth and wealth building. To achieve meaningful returns while investing in stock funds, a lengthy time horizon is required. Giving the fund enough time to grow is always essential.

 It is a thumb rule that the higher the risk, the higher the returns. One has to have a risk-bearing capacity so as to get higher returns.

 Investors have a variety of options when it comes to investing in equity funds. For large-cap equities funds, blue-chip businesses are frequently a better investment choice. Other options include small-cap and mid-cap funds that make investments in upcoming market leaders. Multi-cap funds, which combine the aforementioned three types of funds, are a fourth category.

For people who don't want to participate directly in the stock market but yet want to earn larger returns with a little less risk, equity funds are a good option.

Particular	Equity Fund	Debt Fund
Objective	Equity funds are best suited for the creation of wealth and capital appreciation.	Debt funds bring stability with the steady generation of income.
Ideal Period of Investment	Equities pay good returns on a longer-term	The Debt funds provide good returns in a short term.
Returns	Over a period of 15 years, approximate returns of 12-14% can be expected.	Over a period of 5 years, a return of approximately 8-10% can be expected.
Risk	Risk and return go hand in hand. Equity funds involve a high risk of capital loss.	Debt funds involve lesser risk and very less chance of capital loss.
Taxation	If the mutual fund units are sold within 1 year then the gain is called Short term capital gain and is taxed. While if it is sold after 1 year from the date of purchase, the gain is called Long-term capital gain. The rate of taxation is declared in the budget every year.	Investment in a debt fund if sold within 3 years from the date of purchase attracts Short term capital gain. But, if sold after 3 years then it is long-term capital gain.

 CONCLUSION

Equity and Debt funds are meant for different purposes. The choice of the fund depends on the goal, tenure of the goal, and Risk appetite.

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