Surely you would have got ample number of opinions on whether to invest in Equity funds or Debt funds. Understanding the key differences and characteristics of these funds will help you decide which will suit you better. Before starting with difference it is very essential to know what is Mutual fund, since Debt funds and Equity funds are broad classification of Mutual funds.
Brief about Mutual Funds:
Mutual funds is a pool of investments or in other words it is an Investment fund in which group of people invest and this is managed by professional Funds manager. There is no restriction of the investor nature, Individual and also Institutional bodies can invest in Mutual funds.
Mutual funds is largely popular among the Investors as it offers diversification in investing funds to optimize the risk and maximize the returns. In fact Mutual funds offers higher returns than the conventional investing options with access to larger portfolios and you are also allowed to invest in small amounts.
Equity is the most popular investment mutual funds which offers scope for high returns. Reason for which is by investing in shares of companies of various market capitalization. Equity Mutual funds provides higher return than Debt mutual funds or Fixed deposits.
Equity mutual funds is highly volatile as it totally dependents on how the company balance sheet performs. In various ratio, an equity funds manager invests 60 percentage of investment in the company’s equity shares.
Depending on the fund manager investment can be purely on Large cap funds or Mid cap funds or sometimes mixture of both. Additionally, the investing drift may be value or growth oriented.
To mitigate the high risk tangled with equity shares, funds manager allocates the other 40 percentage of investment amount into various debentures shares, money market instrument or government bonds. This 40 percentage is also helpful in case of several redemption request by the investors.
Who should invest in Equity Funds?
Investors who are well versed with the market, invests in the equity funds and their investment decision is aligned with the risk tolerance of equity.
Also, Budding investors who wishes to explore the stock market also may choose Equity funds purely based on the large cap funds. As these large cap funds invests in equity of top 100 companies listed in the stock exchange.
Investing in a Debt funds is similar to Issuing a Loan to the debtor. Debt fund manager majorly invests the funds in high rated fixed income securities such as government bonds, Commercial papers, treasury bills and other money market instruments.
Risk is very low as the major scope of investment in high rated fixed income securities. You should also know that if you hold a Debt fund more than 36 months then interest gained is taxable every year as per the Income tax slab.
Debt funds are considered highly liquid asset as you can redeem the debt funds in one working day. Investing in Debt fund is a good idea when the market is volatile since it will give you steady income in a constant range.
Who should Invest in Debt Funds?
Debt funds optimize the risk by investing in various fixed income securities which allows the investor to get a decent return. Return from the Debt funds is highly predictable since it is a safer avenue for the conservative investors.
Short term investors who have placed funds in bank saving account can very well invest in debt funds. Short term tenor is 3 months to 1 year. Debt funds give you 50 percentage more earning than the bank saving account. It is also highly liquid which can be redeemed within one working day.
Long term investors, who have placed funds in Banks fixed deposits any reconsider their investment. Debt funds provide better returns than the Fixed deposits, however debt funds is not guaranteed such as Fixed deposits.
Khalid Ahmad is an MBA and finance enthusiast with 10 years as finance consultant and a passionate blogger, running the personal finance blog, EasytechBank.com. He shares knowledge and simplifies things in the field of finance and investment for the common people.