Debt Funds V/S Equity Funds

Thursday 16th May 2019
Author: Shreya Uppal

Highlights

For far too long, there has been much confusion and debate over where one should invest either in Equity Funds (also known as Equity Mutual Funds) or Debt Funds (also known as Debt Mutual Funds). To allocate the assets in an optimum way, an investor must know the difference between the two.
Major differences between debt and equity funds has been mentioned below:

For far too long, there has been much confusion and debate over where one should invest either in Equity Funds (also known as Equity Mutual Funds) or Debt Funds (also known as Debt Mutual Funds). To allocate the assets in an optimum way, an investor must know the difference between the two.
Debt Funds
It is a type of mutual fund which raises money from the public and then invests a major portion of this amount in various fixed income earning investments like Govt. Bonds, RBI Bonds, and other highly rated securities.
Equity Funds
An equity fund, also known as a stock fund, is a type of mutual fund that invests shareholder’s money principally in stocks. The equity funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography.

Major differences between debt and equity funds are:

Basis	Debt Fund	Equity Fund
1. Nature of the Fund	In Debt funds, the money pooled from people is invested in fixed income instruments like government bonds, corporate bonds, non-convertible debentures, and other highly-rated instruments.	In Equity funds, the money raised from investors is put into equity and equity-linked instruments. For example, if a fund invests more than 65 percent of their portfolio in stocks, they are generally considered as equity funds.
2. Risk Factor	The debt funds which usually invest in Fixed Income earning investments are safer as compared to equity funds.	Equity funds are riskier as compared to debt funds. Equity securities are volatile by nature and sensitive to economic factors like Inflation, Tax rates, bank policies, etc.
3. Returns	Debt funds give steady returns but in a constant range. Since debt funds invest money in treasury bonds, there’s much less risk associated with them. These funds are a good investment option when the market is volatile.	Equity Mutual Funds give good returns over the long period of time as compared to debt funds. However, the possibility of losses and negative returns is also higher when the market is volatile. These funds are good when the markets are booming.
4. Taxability	Refer Table below	Refer Table below

To understand the Taxability of Debt and Equity funds we must have a look at the table below:

Type of Fund	Period of Holding	Tax Rate
1. Equity Mutual Fund	Less than 12 months i.e. Short Term	15%
2. Equity Mutual Fund	12 months or more i.e. Long Term	Tax-free
3. Debt Mutual Fund	Less than 36 months i.e. Short Term	As per Slab Rate of an assessee
4. Debt Mutual Fund	36 months or more i.e. Long Term	20% with Indexation