Differences between equity and debt funds: All You Need to Know

Equity funds mostly invest in the stocks and shares of public companies while debt funds are those mutual funds that invest in corporate and government bonds

Representational image. Reuters

Mutual funds are one of the most common and popular forms of investment across the world. Among the different types of mutual funds, equity funds and debt funds are two of the most commonly chosen mutual funds.

Equity funds are those mutual funds that mostly invest in the stocks and shares of public companies while debt funds are those mutual funds that invest in corporate and government bonds as well as debt securities.

Here are the major differences between equity and debt funds-

Equity Funds

Equity funds invest in shares of publicly traded companies. Equity funds are further divided into various categories based on the companies that the funds are investing in. Equity funds can be classified based on the market segment that they invest in, or based on the market index that they follow.

Equity funds can have medium to extreme risk based on the exact investment portfolio of an equity fund scheme. Though equity funds yield high returns in the long run, the investors in these funds face higher risk as the performance of the scheme is directly linked to the volatility of the market.

Due to the high volatility, it’s best for equity funds to be designated as long-term investments to make appreciable returns.

Equity Linked Saving Schemes (ELSS), the class of mutual funds commonly known as equity funds, also offer tax-saving benefit of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961.

Debt Funds

Debt funds are mutual funds that invest in securities, bonds, certificates and other debt instruments of corporate houses and government entities. Debt funds make it easier for investors to build a portfolio of government debt instruments. As debt funds usually hold debt instruments, the risk associated with these mutual funds is low to medium, depending on the quality of debt being held.

The returns that investors can expect from these mutual funds are relatively low, but mostly consistent. Debt funds can be used for both short-term and long-term investment horizons as they provide a good return for those with a low-risk appetite.

However, unlike equity funds debt funds do not offer any tax-saving benefits under Section 80C of the Income Tax Act.

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