Equity vs debt funds– you need to know about a mutual fund first. Then you will understand this. You should know how a mutual fund works, what is a mutual fund e.t.c.
To know about mutual funds you can check this site.
These are a type of mutual funds. You all want to know that in which fund you should invest, which is a low-risk fund. Here you will get all your answers.
You should know that a mutual fund can be a good option to invest in the stock market if you pick the good funds.
If you are not willing to invest in the stocks directly then you can invest via a mutual fund.
Let’s discuss all the important points here which will clear your doubts.
- The meaning of Equity and debt.
- The meaning of Debt.
- What are equity funds and debt funds?
- Pros and Cons. ( Risk, Returns, Liquidity, Volatility. )
- Where should you invest?
The meaning of Equity —
To understand Equity vs debt funds you need to understand this first.
The basic meaning of equity is ownership. It financially often means issuing additional shares of common stock to an investor. The basic formula of equity is ASSET MINUS LIABILITIES.
We know that if we buy a company’s share then it means that we are buying a small part of that company and in the language of investment we call it Equity.
If the company needs money to grow its businesses and the public invests in it then we can call it equity investment. The public will get shares of that company by investing in it.
What is debt–
In the topic Equity vs debt funds, you need to know about all these very well. We will understand this in the language of investment in the stock market.
Debt means loan. The debt mutual funds are those that provide loans.
When a company, or a financial institution, or the government needs money for a project or to grow businesses, or to maintain regular expenses then these funds give loans to these organizations by taking a decent interest.
What are equity funds and debt funds ( Equity vs debt funds )—
This you can say the main part of the topic Equity vs debt funds.
What is the difference between equity and debt funds?–
|Equity funds||Debt Funds|
|1. Companies registered with SEBI can issue this.||1. Companies, the government, and the financial institutions can issue.|
|2. The expense ratio is higher.||2. The expense ratio is lower.|
|3. You can save taxes by investing in an ELSS fund ( up to 1.5 lac in a year)||3. Here is no option to save taxes.|
The main difference between these two funds is- where the money is invested. If you are investing in an equity mutual fund then the maximum amount will be invested in the stock market.
The equity mutual fund company will invest your maximum amount to buy the company’s share.
And if you are investing your money in a debt fund then the maximum amount will be invested in Fixed income securities.
You can say that the mutual funds give loans to financial institutions, the government E.T.C.
And instead, the mutual fund gets a certain percent of interest from all of them.
Here the mutual fund will charge its fees which we call expense ratio. This is the simple definition or difference between these two funds.
So if you want exposure to the stock market then you can go with the equity fund.
As well as if you want a lower risk with an average return then can go with a debt fund. Since the debt funds invest mostly in fixed-income securities, their returns are limited.
The pros and cons of Equity and Debt funds–
This is the most important part of Equity vs debt funds. Here we will compare this section into four parts. Like- Risk, Returns, Liquidity, Volatility.
The risk in the equity funds is a little higher than in debt funds. But the risk decreases in the long term.
But if you are investing in the short term then the risk can be very high.
Now if we talk about debt funds then just because your entire money is going to government securities or in the form of a loan in a financial institution and you are getting an assured return, the risk here is also reduced.
- Now if we talk about returns then in the equity fund, as the risk is higher, the expectations of return increase. But in the short term, the return may decrease or increase.
- But if you are investing in the long-term then returns are more likely to increase. You can expect a 13-15 percent of return if you are investing for 5-10 years.
If we talk about the debt fund’s return you can get a 7-8 percent return. Here you are investing in fixed income securities. So you are getting an average assured return.
This is not dependent on the market. Even if the financial institutions or companies are at loss, you will get the return.
- Just as a bank lends money to someone and charges interest on that, so you are lending money to financial institutions, the government, or a company and receiving an assured interest.
It is also an important part of Equity vs debt funds.
This means how quickly you can get your money out of an investment. In both cases, you will be able to withdraw money very quickly. But the equity fund liquidity is comparatively is little less.
- Because- If your investment runs in minus then you may not want to redeem your investment or money. This you can say a reason why the liquidity is a little less in an equity fund.
- In debt funds, the liquidity is very high. Also, you are getting an average return of 7-8 percent.
- In simple language, it means going up or down the market. If we talk about equity funds then surely the volatility is very high here. Because any time the price of the share can go up and down.
Like – at any time the market can go up by 50 percent and can go down by 30 percent. ( just an example).
But as we discussed before if we invest for a long time then surely we can get a decent return in an equity mutual fund.
- But in the debt funds, the volatility is very low or you can say it is negative. In the debt funds, you are getting an assured return. If too much the return can go down or go up by a half or one percent.
If too much the return can go down or go up by a half or one percent. Such as 7 or 7 and a half instead of 8.
Where to invest–
This is the most asked question in the topic Equity vs debt funds.
This is depending on three factors. These are Age, Risk Appetite, Disposable Income. Here age means what is the position of your career right now, risk appetite means how much you want to take ( it is different for every human being ).
And disposable income means how much money you have to invest ( it is also different for every human being ).
So we can use one thumb rule here. Let’s assume you want to invest 5000 rupees monthly. The calculation will be-
If your age is 30, you can invest 30 percent of your money in a debt fund ( 30 percent of 5000 is 1500 ). That means investing according to your age. So invest that percent of money whatever your age is.
The rest 75 percent money you can invest in equity funds. But this is not the only rule you should follow. This you can use a strategy.
It is assumed that the younger you are, the better your ability to take risks.
If someone is 50 years old then he should invest 50 percent of the disposable income as per the thumb rule but if he wants a little fixed income, he can invest more than that.
On the other hand, if he has high disposable income and he can take risks, then he can invest a high percentage of that money in equity funds.
As we discussed before, just take decisions according to your age, risk appetite, and disposable income.
1.Which is a better debt fund or equity fund?
You should not compare like this because it depends on your needs.
A debt fund will give you a little more security with an average assured return and in the equity fund, the risk is a little higher than debt although you can get a good return if you invest for a long time.
2.What is equity and debt in a mutual fund?
We have discussed this before in this article. So read the article carefully.
3.Why is debt preferred over equity?
Since the risk is much lower with an assured return in a debt fund, people prefer it in most cases.
The debt fund is for those who don’t want to take much risk and want to earn more than FD.
Debt funds meaning-
This also we have discussed before. Read the article to know more.
Hope you like the article.
If you have any other questions in your mind then you can comment below. So comment to know about anything related to this topic.
5.Is it good to invest in debt funds?
Yes, it can be good. The main important or good thing in it is lower risk. These funds have lower risks than equity.
So if you want to earn a decent return with lower risk then you can choose it.
If you have any other questions on this topic then please comment below.