Equity Mutual Funds vs. Debt Mutual Funds: Understanding the Key Differences

3 Jan 2025 , 10:11 AM

The trend of investing in mutual funds is on the rise, and rightfully so. You will find many investing in equity and debt funds. This makes them one of the most popular instruments for growing your wealth these days.

You can think of these assets as perfect tools to meet the investment goals of investors with varying risk appetites. Also, these investment tools are less risky than conventional stocks.

But which asset is the right choice for you? Both equity and debt mutual funds have their unique characteristics. This blog will explain these characteristics and differences to help make an informed choice.

Understanding Equity and Debt Mutual Funds

Among Indians, equity debt funds are one of the most common ones. Also known as open-ended equity funds, these funds are your tickets to invest in listed and unlisted funds. You can buy and sell these equity shares at any point in time, giving you the next level of liquidity. More importantly, these funds often come with greater return potential, giving you the right tool to grow your wealth.

On the other hand, we have debt mutual funds that invest in different debt instruments. These include assets like government securities, bonds, treasury bills, and even debentures. These funds will provide you with a steady income with relatively less risk. However, this lower risk also means the potential to earn handsome returns is relatively less.

Primary Differences Between Equity and Debt Mutual Funds

Now that we better understand what these funds are all about, it is time to look at the primary differences between debt and equity funds. So, refer to the following for a clearer idea on the matter:

Particulars	Equity Mutual Funds	Debt Mutual Funds
Risk	Moderately higher risk	Low to medium risks
Investments	Invests in shares of companies traded on the stock market	Invests in debt instruments like bonds, debentures, and treasury bills
Returns	Relative higher return potential in the long run	Comparatively lower return potential in a given period of time
Taxation	15% tax on its capital gains, provided you held the funds for a period not exceeding 12 months	Attracts short-term capital gains tax, especially if you hold them for a period of less than 36 months
Investment Horizon	Ideal for meeting long-term investment goals	Perfect for both long and short-term investment goals
Potential Savings on Tax	Allowed as long as you invest up to Rs. 150,000 in a period of 12 months	There is no scope for any tax savings

How to Choose the Right Funds For You?

Choosing the right funds to invest in, between equity mutual funds and debt mutual funds, is easy when you take the right approach. So, here are some of the considerations that you must keep in mind:

• Investment Goals: The first thing you must consider is your investment goal. This means understanding what you wish to achieve with this investment and deciding accordingly. Investors with long-term goals can be better off with equity mutual funds, while debt mutual funds are better for meeting short-term goals.
• Risk Tolerance: The next important consideration is your risk appetite. If you are looking for better returns, you must choose equity mutual funds that come with greater risk. If you prefer more stability and less risk, debt mutual funds are better for you.
• Expert Guidance: When it comes to finance, it always helps if you seek necessary expert guidance. They will better understand your financial situation and help you make a more informed choice. This will make it much easier to meet your investment goals.

In Conclusion

Both equity mutual funds and debt mutual funds are great investments when you take the right approach. You must always understand what is debt and equity funds, seek guidance from experts and evaluate your risk appetite and investment goals. This will help you make a more informed choice, reduce risks, and easily meet your investment goals.