Everything You Need to Know about Debt and Equity Funds

What is a mutual fund?

A mutual fund is the collected money of a large number of people (or investors) which is then managed by a professional fund manager. The collected money is then invested in equities, bonds, money market instruments and other securities.

There are many Types of Mutual Funds such as debt funds and the equity fund.

The differences between the two arise from where the money is invested.

What is a Debt Fund?

What is Debt Fund?

 A Debt Fund invests in fixed income instruments that offer capital appreciation, such as Government Bonds, corporate debt securities, and money market.

Investing in debt funds allows for a low-cost structure, relatively stable returns, relatively high liquidity, and low risk.

They are beneficial for investors that aim for:

1. Regular income.
2. Safe ventures 
3. Steady returns with low volatility.
4. Tax efficiency.

What is Equity Fund?

What is Equity Fund?

An equity fund invests in shares/stocks of companies to provide the benefits of professional management and diversification to ordinary investors.

There are two kinds of equity funds:

1. Active Fund: this is where a fund manager researches the market to look for the best stocks to invest in.
2. Passive Fund: this is where the fund manager builds an index mirroring the popular market index.
3. Equity Funds are also divided as per Market Capitalization, which is the value of a company's equity, according to the capital market.
4. They can also be classified as Diversified – where the investment is done across the entire market spectrum – or   Sectoral – where the investment is restricted to a particular sector.

The Difference Between Debt and Equity

Debt funds invest in fixed income securities, equity funds invest in equity share and related securities.

Depending on the investors’ requirements and affordability, some investors with long term goals must choose an equity fund, whereas, investors with short to medium term goals and safe ventures might opt for debt funds.

Equity funds potentially offer higher returns, but with risk, whereas, debt funds are comparatively, low risk and offer moderate to low returns.

• In terms of safety of capital, debt funds ensure better safety than equity funds.
• In terms off tax liabilities, debt funds, which are held for 36 months are taxed at 20% with indexation. 

Equity funds, which are held for 12 months or more, are exempt from capital gains tax. Equity funds held for 12 months or less are taxed at a flat rate of 15%.