Difference between Debt and Equity

Mutual fund investments have become a popular method of safekeeping and growing your funds for future financial goals. However, a few schemes come handy during the need to save money, grow money and provide security to the funds, such as equity and debt fund.

Both being most-chosen by newcomers who wish to grow their money in various ways, equity fund and debt mutual funds have gained their place as two trustworthy schemes in the recent market.

Now, what is the equity fund? Well, unlike debt fund which invests in government-oriented securities and bonds, equity funds opt for company stocks and shares. Such a mutual fund scheme believes in thorough market research of company portfolios, scanning the market for fluctuations and provides their investors with stocks that perfectly suit their needs.

Equity funds, unlike debt funds, plays with the idea of risk factors, as their investors believe in studying the market, understanding the risk formats to gain the most profitable returns out of the investment.

A scheme so diverse provides long-term and profitable returns, with benefits such as tax deduction from income (ELSS scheme), diversified investment options through various sectors and even a Systematic Investment Plan (SIP).

Not to forget, you can always choose from a plethora of options under market capitalization such as:

• Large Caps: Stocks from dominating markets with stable activities and low-risk factors.
• Mid Caps: Although there are more risk-factors in mid-cap stocks, the potential growth is much more than large-cap here.
• Small Caps: small or micro-cap schemes have the potential for growth in the market as from new companies, hence there is a large risk-factor involved. 

Now that we know about what is equity mutual funds scheme, let's understand the debate, that is equity funds vs debt funds

Here are some of the difference between debt and equity funds:

• Nature

Debt mutual funds invest mostly in non-convertible debentures, government bonds and securities in the market. Such units provide a fixed-income benefit to the public who wishes for lumpsum and steady return from the investment. Such funds have lower-risk rates and more secure.

Equity funds work with company stocks and shares of various caps after scanning the market and understanding potential returns. Investors of equity funds wish for profitable earnings and growth in their capital. Such funds can be volatile due to fluctuations, recessions and currency value changes in the market. 

• Taxation

For debt fund schemes, the taxation on short-term investment depends upon the market while for long term (more than 3 years) is 20% Whereas, short-term equity funds fall under a 15% tax rate while long term ( more than 1 year) remains tax-free. 

Hence, if you have a high-risk appetite and desire profitable returns for money growth, opt for Equity funds.