Know the Difference Between Debt and Equity Funds - Which is Better?

A look at the key points of difference between Debt and Equity

Key Takeaways

Equity funds are investments in shares.
Debt funds essentially invest in fixed income securities.
Equity funds offer higher returns, although they are more volatile characteristically.
Debt funds are secure investments; however, they yield lower returns.
Equity funds are better for long-term investments, and debt funds are great for both long and short-term investments.

While planning a mutual fund investment, you should keep your personal investment goals in mind. With different kinds of mutual fund investment options available, it does help to understand the two most important types of mutual fund investment options: debt fund and equity fund. A look into debt funds vs equity funds can help you decide which mutual fund investment will suit you better.

What Is A Debt Fund?

Debt funds are those mutual fund schemes which invest in fixed income securities like bonds and treasury bills. Almost like fixed deposits, a debt fund would be an investment in debts and other securities which generate a fixed income. These securities include government securities, certificates of deposits, treasury bills, and corporate bonds, among other financial market instruments. Debt funds have a fixed period of maturity based upon the time of the debts.

What Is An Equity Fund?

Equity funds are investments in company shares and related securities which have the potential for rapid growth. Investors receive dividends based on the performance of the shares in the market. According to SEBI Mutual Fund Regulations, an equity mutual fund scheme in India must invest at least 65% of its assets in equities and equity-related instruments. Equity funds are categorised with respect to the size of the companies and the investment style of the holdings.

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Equity Fund Vs. Debt Fund – The Major Differences

Here are some of the primary differences between debt and equity funds:

Returns

A comparison of equity vs debt funds shows that equity funds tend to generate higher return rates than its counterpart. Return rates for equity funds can reach anywhere between 8-25% on average, based upon the size of the fund.

Equity funds are volatile initially but yield higher returns if you stay invested for a more extended period. Conversely, returns accrued from debt funds may be stable but slightly lower. Once again, you get higher returns by staying invested for a longer duration.
Investment Portfolio

Equity funds invest in stocks with a high chance of growing and are also likely to deliver lucrative returns. Generally, equity funds invest across a range of market caps - large, medium, small.

Debt funds invest in bonds and other debt instruments that generate comparatively lower returns but maintain stability and assurance of the returns.
Risk Factor

Comparing equity mutual funds vs debt mutual funds, the risk factor in the former is much higher. The performance of an equity fund essentially depends on the stock market, which is volatile. The volatility and fluctuations increase the risk factor compared to debt funds that have stable returns due to a fixed period of maturity.

Investments in both equity and debt funds are beneficial. Between equity vs debt mutual funds, you should invest based upon your investment objectives, risk profile and preferred investment tenure.