Equity vs debt mutual funds: Key things to know before investing
Mutual funds are gaining traction among investors, especially those seeking higher returns compared to traditional investment instruments. They offer exposure to a variety of asset classes, and fund houses provide a broad selection of funds to meet the needs of investors across different income categories.
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The two main types of mutual funds are equity funds and debt funds.
Equity Mutual Funds
Equity mutual funds invest in stocks, aiming for long-term capital growth. These funds are suited for investors with a higher risk tolerance, as they are subject to market fluctuations.
Equity mutual funds provide exposure to a variety of stocks, reducing the need for investors to directly invest in individual stocks. They can be an option for those looking to enter the stock market with less direct exposure to volatility.
Subcategories of equity funds:
Large-Cap Funds: Invest in established companies with a stable market presence.
Mid-Cap and Small-Cap Funds: Focus on mid and small-cap companies, which have higher growth potential but may be more volatile.
Sectoral or Thematic Funds: Target specific industries or trends, such as technology or healthcare.
ELSS (Equity Linked Savings Schemes): Provide tax benefits under Section 80C of the Income Tax Act, in addition to potential long-term growth.
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Debt mutual funds
Debt funds invest in fixed-income instruments like government bonds, corporate bonds, and treasury bills. These funds generally offer lower risk compared to equity funds, making them more suitable for conservative investors.
Types of debt funds
Liquid Funds: Invest in short-term instruments, offering high liquidity.
Short-Term and Ultra-Short-Term Funds: Focus on instruments with shorter maturities, suitable for short investment horizons.
Gilt Funds: Invest in government securities, which typically offer a higher level of credit safety.
Corporate Bond Funds: Primarily invest in corporate debt, balancing returns with moderate risk.
Equity vs debt mutual funds
Equity funds invest primarily in stocks and come with a higher level of risk, but they also have the potential for higher long-term returns. As per SEBI regulations, equity mutual funds must invest at least 65% of their assets in equities and equity-related instruments. These funds can be actively or passively managed and are categorized based on company size, portfolio holdings, and geographic exposure.
Debt funds, in contrast, are generally considered lower-risk investments. These funds focus on government securities and corporate bonds.
According to SEBI guidelines, debt funds must allocate at least 10% of their assets to liquid holdings.
Bank and PSU debt funds can invest up to 72% of their assets in debt instruments of banks and government-owned companies.