Here’s Why Equity & Debt Funds are the Wise Investment Options!

Mutual funds offer practical and multi-varied investments solutions that take care of the different investments and risk appetites of the investors. All investors do not have the same financial goals, thus, their risk propensity and appetites vary according to their life environments and financial situations. The selection of a specific mutual fund also depends on whether the investors are having multiple financial goals at a point of time. Selection of the perfect mutual fund scheme can only be done by understanding the finer points of equity funds and debt funds.
Many of us cannot distinguish between the different types of mutual funds such as equity and debt funds. This lack of knowledge can result in suboptimal returns and loss of trust. Hence, a thorough understanding of these funds is essential to make the best out of them. In this article, we’ve explained about both these investment options.

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What are the Equity Funds?

These are concerned with the portfolios consisting of company shares and derivative securities like options and futures. The main objective is to trade these equity funds on the stock market to increase the capital levels in addition to the dividend payments, which offer periodical revenue to the holder of the equity funds.

Investors in India have a dual choice in front of them. Whether to invest in equity or debt funds? Generally, equity funds comprise of more volatile assets when compared to the debt mutual funds.

Equity funds are segregated into large cap, small cap and mid cap funds. Large cap funds pertain to investment in the top 100 largest market capitalization companies. Mid cap funds relate to investments in the companies, which occupy the places from 101 to 250 in the range of market capitalization.

Why Should You Invest in Equity Mutual Funds?

Equity mutual funds are on the rise due to an increase of international investments. Individuals are flocking to buy equity funds due to the profitable exposure to international stocks. The confidence level of investors in equity mutual funds are increasing due to the effective management and asset monitoring activities that are being carried out by reputed financial companies.

Equity mutual funds offer one of a kind exposure to globally-valuable and thriving digital assets with time-tested strategies. Investment ecosystems in equity mutual funds follow the highest levels of compliance and are managed by highly qualified wealth managers.

Investments in equity mutual funds help individuals to save on taxes. Equity linked savings schemes also referred to as ELSS offer up to Rs 1.5 Lakh savings per year under various provisions of the Income Tax Act. The long term capital gains tax is tax proof up to an amount of Rs 1 lakh.

Diversification

Wealth managers of equity funds spread your investment in various funds, which decrease the risk of losses. Your investment does not go in its entirety to a single company or specific type of companies of the stock market. This financial acumen is similar to the adage of not keeping all the eggs in the same basket. Diversification helps investors to spread their capital across different market instruments and there is a good probability based on logic and tradition that our investments will grow over time.

Enhancement in Capital Levels

Investing in mutual funds is always a choice between equity and debt funds. The smart thing to do here is to analyse the nature and quantum of growth in your capital portfolios. Equity mutual funds are considered to give more capital returns than debt mutual funds.

Long-term Financial Growth in Corpus

Stock markets are prone to short term volatility, which may result in variation in your fortunes. Equity mutual funds offer a balanced long term growth. Rupee cost averaging can result in increased savings for investors as the risk factor becomes negligible.

What are the Debt Mutual Funds?

Debt funds are all about investment in money market. You may have heard of commercial papers (CPs), non-convertible debentures and government bonds which are examples of debt funds. The main goal of debt funds is to get interest payments as regular income. With the changes in inflation, debt mutual funds are not prone to fluctuations that increase their demand among those who don’t want to take undue risk in the shorter term.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Difference between Equity and Debt Mutual Funds

Although belong to the Mutual Fund Category, they both differ in some aspects:

  • Return on Investment: Debt mutual funds have return in the low to moderate category. Investors can receive higher returns in the long term through debt funds.
  • Risk Appetite and Expenses: The risk category in debt funds falls between low to moderate risk. Debt funds also have the benefit of capital appreciation by making hedges on interest rate calls. The equity mutual funds have an expense ratio much lower than the debt funds.
  • Window of Buying and Selling: In equity mutual funds, the timings of buy and sell are not particularly important when determining the return on investment. The exact duration of the investments raises the probability of handsome returns in equity funds.

In the case of debt mutual funds, the exact timing when the buy or sell option is exercised is vital to enhance the capital levels. Debt funds are highly sensitive to the market volatility when compared to the equity mutual funds.

  • Suitability of Individual Investors: Debt mutual funds offer the option of lowering the overall risk for the investor up to duration of 1 year. This enables stability of periodical income to the investor. Debt funds can be used analogous to savings bank accounts and fixed deposits receipts.

Equity funds are ideal investments choices for long term investments and offer a high-risk spectrum to investors. With high risk always comes the attractive option of getting high returns. This helps the investors to fulfil their cherished long-term dreams.

Final Word!

Most of the investors pay attention to the risk appetite level and the probable returns to come to a quick decision for investing their funds. The difference between the equity fund and debt fund has to be understood carefully in the parameters of risk and quantum of returns to make a wise investment choice.

Equity funds can be avoided if one is averse to risks in the short term. Long term profits are rest assured in debt mutual funds. Debt mutual funds are mostly preferred by retirees who want to ensure safety and moderate levels of returns on their savings.

 

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