Equity Funds vs Debt Funds

Updated on 16 Oct, 2023

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Mutual funds offer a wide range of investment solutions to meet the different investment needs of individuals. Also, there are different mutual funds that may be suitable for individuals with varying risk appetites. As an investor, you may have different financial goals and different tenures to achieve each of them. Similarly, your risk appetite would vary depending upon the stages of life at which you initiate investment. Therefore, comparing equity funds vs debt funds allows you to make informed investment decisions to achieve your goals.

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What are Equity Funds?

Equity mutual funds invest the pooled corpus of money majorly in shares and stocks of different companies. In simple terms, equity mutual fund invests in shares on your behalf. Over 65% of the portfolio of equity mutual fund comprises of investment in equity and equity-related instruments, like preference shares.

What are Debt Funds?

Debt funds are mutual fund schemes that invest a major portion of the pooled corpus of money in debt or fixed-income instruments. Examples of such instruments are corporate bonds, debentures, government securities, and money market instruments like treasury bills, commercial papers, and certificates of deposits.

Equity Funds vs Debt Funds

Following are the key differences between equity funds vs debt funds:

	Equity Funds	Debt Funds
Investments	Equity funds primarily invest in shares of companies that are traded in the stock market. They also invest in securities like derivatives (i.e. futures, options). Therefore, equity funds are a volatile asset class when compared to debt and are suitable for investors with high-risk appetites. They are ideal for capital appreciation in the long term.	Debt funds primarily invest in debt and money market instruments with the objective of generating income through interest payments. The money market instruments include commercial papers (CPs), Treasury bills (T-Bills), certificates of deposits (CDs), and Debt market instruments include Government Bonds, non convertible debentures (NCDs), and Government Securities. These funds, therefore, focus on generating regular income. However, some debt funds may help with a capital appreciation for investors. Debt fund investments are comparatively less risky and their returns are not directly subject to market volatility.
Returns	Returns from equity funds are higher in comparison to debt funds in the long term.	Returns from debt funds are low to moderate in comparison to equity funds.
Risk Appetite	Investors with moderately high to high risk-taking capacities can invest in equity funds.	Investors with low to moderate risk appetites can invest in debt funds.
Expense Ratio	The expense ratio of equity funds tends to be much higher, as they are actively managed by fund managers.	The expense ratio of debt funds is low in comparison to equity funds.
Timeframe	Equity funds are subject to market volatility therefore, investment timing has an impact in the short term.	On the contrary, the duration of investment of debt funds needs more attention.
Investment Duration	They are a long-term investment option suitable for achieving long-term financial goals.	The investment duration of debt funds ranges from 1 day to many years. You can select them as an investment alternative to fixed deposits and savings bank accounts.
Taxation	You must pay 15% tax on capital gains from equity funds if you hold them for less than 12 months. Consequently, capital gains on holding equity funds for more than 12 months are tax-exempt up to Rs 1 lakh. Any gains beyond Rs. 1 lakh are taxed at 10%.	Until March 31st 2023: You must pay short-term capital gains tax if debt funds are held for less than 36 months. Consequently, tax will be levied at the income tax rate applicable to you. If you hold the debt funds for more than 36 months you can avail of indexation benefits. Long-term capital gains are taxed at 20% post allowing indexation benefits. From April 1st 2023: All capital gains from debt funds are taxable as per the investor’s income tax slab rate. No LTCG benefit.
Tax Benefits	ELSS mutual funds allow tax savings by investing up to Rs 150,000 in a year.	On the contrary, debt Funds do not give an option to save taxes.

ALSO READ Debentures vs Bonds

Equity vs Debt

Following are the major differences between Equity vs Debt:

Equity	Debt
The capital is owned by the company.	The capital is borrowed by the company.
Only SEBI registered companies can issue equities.	Any company or even government can issue bonds.
Highly volatile and risky.	Moderately volatile and risk is also relatively low for high-quality debt.
Shareholders have ownership of their holdings in the company.	Investors are creditors to the issuer.
Returns from equity can be earned through dividends or as profits from trading.	Returns from debt are earned as regular interest at pre-decided rates.

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