Difference between Equity vs Debt funds. Which is better?

Equity vs Debt Funds which one is better is an ongoing discussion between investors who are interested in mutual funds as their investment vehicles.

Although both these funds are good investment schemes each of them behaves differently when it comes to various parameters like returns, taxation, duration, and investments. 

The selection of a specific fund depends upon personal preference, risk appetite, and the financial goal of the investor. 

Some investors find it difficult to distinguish between equity funds and debt funds. Let us get a better understanding of both investment options so that the knowledge can help to make viable decisions.

What is an Equity Fund?

Equity funds are mutual fund schemes with investments in company shares and related securities like derivatives (futures and options) that trade in the stock market and have the potential to grow rapidly.

The objective is capital appreciation and dividend-paying stocks that provide an income to the investor. 

Equity funds are categorized as large-cap, small-cap, mid-cap, and thematic funds. When a fund manager invests more than 65% of the portfolio in stocks it is considered an equity fund.

What is a Debt Fund?

Debt funds are mutual fund schemes with investments in securities and money market instruments that generate fixed income.

These are corporate bonds, commercial papers, treasury bills, non-convertible debentures, certificates of deposit, and government securities. 

Debt funds are secure investments, with lower returns and a fixed maturity period.

Differences between Equity vs. Debt Fund

1. Instruments

Equity funds invest in company shares traded in the stock market and securities and derivatives like options and futures whereas debt funds invest in debt and money market instruments like corporate bonds, commercial papers, treasury bills, non-convertible debentures, certificates of deposit, and government securities. 

2. Return on investment

Equity funds yield higher returns in the long run whereas the return on investment in the case of debt funds is low to moderate when compared with equity funds. 

3. Tax saving options

Investors can save taxes by investing in ELSS mutual funds up to INR 150,000 per year. There is no such tax-saving option for investors in debt funds.

4. Risk appetite

Investors with moderately high to high-risk appetites opt for equity funds whereas investors with low to moderate-risk appetites choose debt funds as their investment vehicle.

5. Timings

The timings of both buying and selling of equity funds are very important as they are dependent upon the stock market which is known for its volatility.

The timings of buying and selling in the debt funds are not as important as it is for equity funds. The duration on the other hand is more important than the timing for a debt fund. 

6. Expense Ratio

In equity vs debt funds, the expense ratio of equity funds is much higher as it is managed by fund managers whereas the expense ratio of debt funds is lower when compared with equity funds.

7. Taxation

Investors have to pay a 15% tax on capital gains from equity funds that are held for less than 12 months. The capital gains on equity holdings for more than 12 months are tax-exempt up to an amount of INR 1 lakh.

All the gains beyond this amount are taxed @ 10%. 

In equity vs debt funds, if investors are holding debt funds for less than 36 months then they will have to pay short-term capital gains tax and it will be taxed as per the tax bracket of the investor.

When the debt holding is for more than 36 months investors can avail of indexation benefits and post it the long-term capital gains are taxed at 20%. 

8. Investment duration

Equity funds are investment options for the long run as they help investors to meet long-term financial goals.

Debt funds are investment options for the short run as the duration ranges from 1 day to several years. These are often used as alternatives for savings and fixed-deposit bank accounts.

How can one invest in equity or debt funds?

Investors can take the help of financial advisors at the Edufund App for informed decisions as the platform offers an option to choose from 4000+ mutual funds in both equity and debt fund categories.

The platform guarantees transparency and secured transactions because of top-class 128-SSL security. 

Moreover, the value-added benefits like zero commission, no hidden charges, free advisory, and tracking investments through Edufund’s scientific fund tracker help to save a good amount that can be invested further in either or both equity and debt funds. 

Conclusion

In the discussion between equity vs debt funds, it is important to note that these are tax-efficient investments when compared with other asset classes.

Both are mutual funds that help investors to meet their investment goals effectively.