Equity vs. Debt: Balancing Risk & Reward with Mutual Funds
29 August, 2024
Synopsis
Equity mutual funds invest primarily in stocks, offering higher potential returns with higher risk, while debt mutual funds focus on fixed-income instruments, providing more stable but generally lower returns at lower risk.
The choice between equity and debt mutual funds depends on investors’ risk appetite, investment horizon, and tax considerations.
Your age matters when choosing how to invest your money. You can take more risks when you're young, so putting money in equity-based funds might be a good idea. These funds can grow a lot over time. As you get older and closer to retirement, it's smart to be more careful with your money. You might want to switch to safer investments like debt funds as they're less risky and can help protect the money you've saved.
Mutual funds have gained widespread popularity among Indian investors as a preferred investment option. They provide a professionally managed portfolio, allowing investors to diversify their money across different asset classes through different mutual funds. Among the different types of mutual funds, equity and debt are two primary categories investors often consider.
Let us look at equity and debt mutual funds, explore their key features and how each category aligns better with your investment objectives and risk appetite.
What is an Equity Mutual Fund?
Equity Mutual Funds primarily invest in stocks of different companies. According to SEBI guidelines, a minimum of 65% of the total assets of such a fund must be equities and related instruments. These funds are appropriate for individuals with a high risk appetite and a long investment horizon, given the short-term volatility of equities but the potential for higher returns in the long run.
What is a Debt Mutual Fund?
Debt Mutual Funds concentrate on fixed-income instruments like corporate bonds and government securities. SEBI mandates such funds must have a minimum allocation of 65% of assets in debt and money market securities. They have lower volatility than equities and offer a moderate but consistent income through interest and capital appreciation.
Comparing Equity and Debt Mutual Funds
Features | Debt Mutual Fund | Equity Mutual Fund |
Instruments | Invest in securities that generate fixed income, like treasury bills, commercial papers, government securities, corporate bonds and many other money market instruments | Invest primarily in stocks |
Return on Investment | Low to moderate | Moderate to high (in the long run) |
Risk Appetite | Low to moderate risk-taking appetite | Moderately high to high risk-taking appetite |
Expenses | The expense ratio of the debt fund is lower | The equity fund expense ratio is much higher |
Suitability | Debt funds present investment possibilities ranging from 1 day to several years, encompassing lower to moderate risk. | Equity funds, designed for the long term, are apt for investors with moderately high-risk tolerance, aiding in achieving enduring financial objectives. |
Taxation | Capital gains on debt funds incur tax aligned with the investor's income tax slab rate. | In equity funds, capital gains from holdings less than 12 months are subject to be taxed at slab rate. Long-term capital gains exceeding 12 months, up to ₹1 lakh, enjoy tax exemption, while amounts beyond are taxed at 10%. |
Tax Saving option | There is no option to save taxes | You can trim down your tax liability by allocating up to ₹1.50 lakh annually to ELSS mutual funds |
Equity and debt mutual funds are the two major types of mutual fund investing in India. Knowing their key features helps investors make informed decisions aligning with their specific investment objectives, time horizon and risk tolerance.
Start your investment journey in equity and debt mutual fund schemes based on your financial objectives by downloading the HDFC Bank SmartWealth App from the Playstore/ Appstore.
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