Mutual funds offer a good range of investment solutions to fulfill the various investment needs of people. Also, different mutual funds will be suitable for people with varying risk appetites. As an investor, you will have other financial goals and different tenures to attain.
Similarly, your risk appetite will vary depending on the stages of life at which you start your investment. Thus, comparing equity funds vs. debt funds allows you to form informed investment decisions to realize your goals.
Difference Between DebtAnd Equity Funds
Returns
Equity funds can deliver relatively higher returns over long periods, whereas debt funds may provide returns in line with inflation or marginally more than inflation. On a long-term average basis, returns for debt are within 9 percent, and equity is within 16 percent.
Investments
Equity funds mainly invest in several individual stocks that have the next chance of growing and delivering returns. Stock picking is finished to match the investment objective.For instance, multi-cap funds invest in stocks across the market caps. This may allow a multi-cap fund to profit from the possibly high returns of small-cap and mid-cap stocks and the stable returns of large-cap stocks.
In comparison, debt funds generally invest fettered and other debt instruments that generate low returns thanks to average interest rates or low price differentials.For example, an overnight fund invests in the overnight reverse repo, bank deposits, bill discounting, etc., all of which have a coffee lending and borrowing rate of interest.
Risk
Equity and debt are market-linked instruments that are correlated to a particular degree. But when the market falls, share prices are known to drop more than debt instruments (bonds, t-bills, etc.).Thus, debt funds are safer than equity funds. Furthermore, overnight funds, liquid funds, and ultra short-term funds are considered the safest mutual funds in India.
Tax Benefits
Tax efficiency could be a concern when it involves debt funds. Short Term Capital Gains (< 3 years) are added to the investor’s income and taxed accordingly.
This may inconvenience investors at the next tax slab since they will find themselves paying more taxes. Long-run Capital Gains (> 3 years) on debt funds are taxed at 20 percent with indexation benefits.However, equity funds can facilitate your saving tax. If you hold equity funds for quite a year, the returns will be exempt from tax up to ₹1,00,000. LTCG (> ₹1,00,000) taxed at 10% (+4% cess); STCG (< 1 year) is taxed at 15% (+4% cess).
ELSS funds, a sort of equity fund, offer tax benefits of up to ₹1,50,000 with a 3-year lock-in period.
Timeframe
Equity funds are known to be volatile within the short term but have the potential to get high returns over 3 to 5+ years. Thus, equity funds are suitable for the long run.
Debt funds are suitable for both the short and long run. The longer the portfolio maturity, the longer the investment horizon. All said liquid funds mature in 91 days, hence it is suitable for the short term.
Conclusion
Mutual funds are one of the only friendly investment options, provided you’re ready to compare equity mutual funds vs. debt mutual funds. While equity funds are risky within the short term, within the long run, they’ll provide a superior return over the other assets class, provided you’re able to take high risk. On the opposite hand, debt funds are often your good friend if you can’t tolerate high risk and are pleased with low to moderate returns and if the aim is capital protection. Debt funds are also alternate investments for fixed deposits and savings checking accounts
Lastly, equity and debt funds are tax-efficient investment options when put next to other asset classes. In summary, both help investors meet their various investment objectives depending upon the investor’s risk-taking appetite and investment objective. Those who aren’t ready to compare equity mutual funds vs. debt mutual funds should talk to a financial advisor to make an informed investment decision.
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