Introduction
Mutual funds offer a wide range of investment alternatives to accommodate a wide range of financial goals, time horizons, and risk tolerances. Depending on their financial status and time of life, different investors have different financial goals and risk tolerances. Furthermore, a single investor might have many financial objectives at any given moment. So, in order to choose the best investment plan, you must first understand the difference between an equity fund and a debt fund, as they are the most significant assets to invest in a mutual fund.
The distinction between the two stems from where the funds are invested.
Debt fund- Invested in fixed income securities.
Equity fund- Invested predominantly in equity shares and related to securities.
Let us first define the terminology.
What is Equity Fund?
A stock fund, sometimes known as an equity fund, is a mutual fund that invests primarily in equities. We may either actively or passively handle it.
The size of the firm and the investing strategy of the portfolio’s assets, as well as its region, are used to classify these funds.
The following are characteristics of an equity fund:
- High reward, high risk
- Three years is the minimum wait time for a return.
- A higher after-tax return
- Possibility of capital loss
- High liquidity, as well as profit/loss and exit load options
The following are some of the benefits of an equity fund:
- Experts look after your money.
- Diversification is provided at a low cost.
- Flexibility and liquidity are provided.
- Having the ability to invest in a methodical manner
What are debt funds, exactly?
It’s a type of investment vehicle, similar to an exchange-traded fund or a mutual fund, that includes fixed income investments as its primary assets. A debt fund can invest in short- and long-term bonds, securitized securities, money market instruments, and floating-rate debt.
Investments in fixed income instruments, such as commercial paper, bonds, G-secs, Treasury bills (T-bills), money market instruments, and so on, make up a debt fund.
It has the following features: -
- Absolute for risk-averse investors that desire a steady stream of income.
- They are less volatile and hence less dangerous than an equity fund.
Summary
In this post, we discussed equity and debt funds, as well as their characteristics. To read distinction between both of those in terms of investment return,risk appetite,expense timing ,suitability & taxation,click here.
Mutual funds are one of the most user-friendly investing choices when comparing equities mutual funds vs. debt mutual funds.
Equity funds, on the other hand, can be a fantastic buddy if you cannot handle excessive risk and are content with a low to moderate return, and your primary goal is capital preservation. While equity funds are riskier in the short term, they can deliver a better long-term return than any other asset type if you are willing to funds, on the other hand, can be a terrific buddy if you cannot handle excessive risk and are content with a low to moderate return, and your primary goal is capital preservation.
Fixed deposits and savings accounts can both be replaced with debt money.
Finally, it is concluded that debt and equity funds are tax-efficient investment alternatives when compared to other asset types.
Also watch: How can Beginners Start Investing?