What are the Differences Between Equity vs Debt Mutual Funds

Learn the differences between Equity and Debt Mutual Funds to make informed investment decisions that match your financial goals
EXPLORE FUNDS
4 mins
03 October 2023

Mutual funds are a popular investment option for many people. They offer a diversified portfolio of investments that can help investors achieve their financial goals. However, not all mutual funds are created equal. There are two popular types of mutual funds: equity mutual funds and debt mutual funds. In this article, we will explore the differences between equity mutual funds and debt mutual funds.

Equity Mutual Funds

A Mutual Fund scheme is categorised as an Equity Mutual Fund when it allocates over 65% of its total assets to stocks. They are also known as open-ended equity funds. The goal of an equity mutual fund is to provide investors with long-term capital appreciation by investing in stocks of companies that have the potential for growth.

  • Advantages of Equity Mutual Funds: One of the main advantages of equity mutual funds is that they may offer higher returns than debt mutual funds. This is because stocks have the potential to generate higher returns over the long term. Additionally, equity mutual funds offer diversification, which means that investors can spread their risk across multiple stocks and sectors.
  • Risk associated with Equity Mutual Funds: One of the main disadvantages of equity mutual funds is that they are more volatile than debt mutual funds. This means that they can experience significant fluctuations in value over short periods of time. Additionally, equity mutual funds are riskier than debt mutual funds because they invest in stocks, which are inherently more volatile than bonds or other fixed-income securities.

Factors To Keep in Mind Before Investing in Equity Mutual Funds

  1. Risk Tolerance: Assess your risk tolerance and investment horizon. Equity funds can be volatile, and your ability to bear market fluctuations is essential.
  2. Investment Goals: Define your financial objectives, whether it's long-term wealth creation or short-term gains. Different equity funds suit various goals.
  3. Fund Selection: Research and choose funds that align with your goals. Diversify your portfolio by including large-cap, mid-cap, and small-cap funds.
  4. Costs and Fees: Understand expense ratios, entry/exit loads, and management fees. Lower costs can significantly impact your returns over time.
  5. Historical Performance: Analyse the fund's historical performance but remember that past performance doesn't guarantee future results.
  6. Fund Manager's Expertise: Assess the experience and track record of the fund manager, as their decisions impact your investments.
  7. Diversification: Diversify across different sectors and industries to spread risk and enhance returns.
  8. Exit Strategy: Have a clear exit strategy to avoid impulsive decisions during market volatility.
  9. Review Periodically: Regularly review your investment portfolio to ensure it still aligns with your goals and risk tolerance.
  10. Tax Implications: Be aware of the tax implications of your investments, such as capital gains taxes, which can affect your returns.

Debt Mutual Funds

Debt mutual funds are mutual funds that invest primarily in fixed-income securities such as bonds, treasury bills, and commercial paper. The goal of a debt mutual fund is to provide investors with regular income and capital preservation.

  • Advantages of Debt Mutual Funds: One of the main advantages of debt mutual funds is that they are less volatile than equity mutual funds. This means that they are less risky and may provide a more stable source of income for investors. Additionally, debt mutual funds offer diversification, which means that investors can spread their risk across multiple fixed-income securities and sectors.
  • Disadvantages of Debt Mutual Funds: One of the main disadvantages of debt mutual funds is that they may offer lower returns than equity mutual funds. This is because fixed-income securities generally have lower returns than stocks over the long term. Additionally, debt mutual funds are subject to- risks such as interest rate risk, which means that changes in interest rates can affect the value of the fund’s holdings credit risk which means the issuer is not able to meet the principal and interest payment obligation on the due date, liquidity risk which means that the risk of not being able to liquidate the investment .

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Disclaimer

Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

BFL does NOT:

(i) provide investment advisory services in any manner or form;

(ii) perform risk profiling of the investor;

(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

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Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing