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Mutual funds are a pool of money collected from several investors for a common investment goal. They are broadly also categorised as equity funds, debt funds and hybrid funds. Each type of mutual fund has a different investment objective and is also suitable for different investors. However, you must be wondering what the difference between equity, debt and hybrid mutual funds is? This article will help you understand the differences between equity vs debt vs hybrid mutual funds.
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Difference Between Equity, Debt and Hybrid Mutual Funds
The following table shows the differences between equity vs debt vs hybrid mutual funds
| Parameters | Equity Funds | Debt Funds | Hybrid Funds |
| Investment Portfolio | Equity funds primarily invest in stocks of companies and also sometimes derivatives (i.e. futures or options) | Debt funds primarily invest in debt securities and also money market instruments | Hybrid funds invest in both equity and also debt instruments |
| Sub categorization | Large-cap funds, mid-cap funds, small-cap funds, multicap funds, large&midcap funds, value funds, contra funds, thematic funds and also ELSS funds. | Overnight funds, ultra short term funds, short term funds and also long term funds. | Conservative funds, aggressive funds, balanced funds, balanced advantage funds and also multi-asset allocation funds. |
| Returns | The returns are dependent on the market performance. | The returns are comparatively stable and also dependent on the interest rate movement. Also, it depends on the credit quality of the underlying securities | The returns are partly stable due to debt composition, and also the remaining depends on the market performance. |
| Degree of Risk | High risk | Low risk | Moderate risk |
| Expense Ratio | The expense ratio of equity funds is high because it is also actively managed by fund managers. | The expense ratio is lower for debt funds when compared to equity funds. | The expense ratio is similar to equity funds with minor differences |
| Redemption Duration | T+3 days | T+1 days | T+3 days |
| Suggested Investment Horizon | Long Term (minimum 5 to 7 years or more) | Immediate to medium-term ( days to many years). also, it varies depending on the type of debt fund. | Medium Term (minimum 3 to 5 years or more) |
| Taxation* | LTCG: If the holding period is more than 12 months, gains up to Rs.1 lakh are tax exempt. Also, beyond Rs.1 lakh is taxable at 10%. STCG: If the holding period is less than 12 months, capital gains are taxable at a 15% flat rate. | LTCG: If the holding period is over three years, gains are taxable at 20% with indexation benefits. STCG: If the holding period is less than three years, gains are taxable per the individual’s income tax slab rate. | Equity-oriented funds are liable to taxes as Equity funds. At the same time, Debt-oriented funds are liable to taxes as Debt Funds |
*Note: As per the Finance Bill 2023, debt mutual funds will no longer have the LTCG benefit. Thus, all the capital gains arising from debt fund investments from April 1st 2023, will be taxed as per the investor’s IT slab rate.
Equity vs Debt vs Hybrid Mutual Funds – Which is Better?
Not all mutual funds suit all investors, as each requirement is unique. For instance, equity mutual funds are suitable for investors who have an understanding of market volatility and are ready to take risks. Also, investors with higher risk tolerance levels can invest in small and mid-cap equity funds. Furthermore, such investors should have a long term investment horizon of a minimum of 5 years+. This will help them combat the market fluctuations and also grow.
Secondly, debt mutual funds are ideal for investors with low-risk tolerance levels. Also, these funds’ returns are pretty predictable as their interest income and maturity value are known beforehand. Thus, the returns are in a range and become a safe investment avenue. Also, investing in ultra short term funds gives investors alternatives for a savings account and fixed deposit. Furthermore, investors with a medium duration of 3-5 years can prefer investing in debt funds.
Thirdly, hybrid mutual funds provide a mix of equity and debt portfolios. Also, it provides a blend of risk and returns to its investors. Furthermore, fund management involves risk management, portfolio diversification, and asset allocation. Thus, this is why hybrid funds are ideal for investors who look for a balance of risk and rewards.
Having all the amount in one basket becomes risky. Instead, creating a mix of equity vs debt vs hybrid mutual funds can help investors diversify their portfolios for better returns keeping risk and reward balanced. However, choosing which fund to invest in ultimately depends on the investor’s profile, i.e. financial goals, investment horizon and risk tolerance levels. Also, creating an investment strategy helps get better results for their portfolio. Furthermore, if you are unsure about your asset allocation strategy, you can always consult a financial advisor. Thus, they can help you make well-informed investment decisions.
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