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Equity vs Debt Funds: Which Is A Better Investment Option

Equity as well as debt funds, both funds are an excellent source of investment as well as income, provided one knows exactly which one to go for. Not every fund is meant for everyone. For e.g., on a broader perspective, those who are vary of risks and bear a tolerance for sudden losses can always opt for equity funds. On the contrary, those are just opposite to it, can opt for debt funds. But that doesn’t prove that debt funds are totally risk free or more beneficial than equity funds. Both the funds are categorized mainly on basis of the amount of risk they expose the investors to. Read on to find out more details on both equity vs debt funds.

equity vs debt funds

Equity vs Debt Funds: Which Is A Better Investment Option?

Let’s find out how equity and debt funds differ and which is a better option to invest:

Equity funds along with higher risks, also promise better returns, but experts recommend that those who are looking for investing into equity funds must invest in it for longer times. Equity funds are classified on basis of risk exposure. Mainly there are following types of equity funds:

  • Aggressive Growth Funds: These funds mainly intent at maximum capital gains, therefore, the fund manager mainly invests the money in highly volatile shares whose reliability and stability is not much known. These funds are exposed to maximum risk.
  • Growth Funds: These funds have the same objective as the above mentioned fund, but only those companies are chosen for investment, that have a calculated scope of good performance. This calculation is based on a methodical calculation and speculative measures are kept on bay in respect to these funds.
  • Specialty Funds: These are specific funds and the companies that are included under this portfolio must meet some particular pre-requisites. These funds are a step up from diversified funds in terms of risk as these finds aim at a specific zone.

Else than these three, there some others funds too, such as diversified equity funds where funds are invested in various sectors. Better known as equity linked savings plan, these funds ensure minimum exposure to risks along with tax benefits. Similarly, equity index funds include those companies that are listed in index.

Debt funds on the other sides are the debt instruments through which companies take debt from investors promising fix returns with interest. The basic nature of these funds consists of low risk pattern along with regular income for its investors. But debt funds will always yield regular and risk free income isn’t necessary. There are chances that companies that take debt may not be able to pay the principal and interest amount to its investors later. To confront such conflicts, SEBI has mandated that only those companies that have good credit ratings and required amount of capital with them, should only be granted with debt raising ability. Like equity funds, there are various kinds of debt funds too such as diversified debt funds, assured return funds, high yield debt funds, and a few others.

But for investment purpose, only knowledge of types of these funds is not enough. There are some peculiar characteristics of these two that you must know before you take any decision. For example, if you choose to go for debt funds apart from regular capital and interest paybacks, number of other perks will be very less. Also the interest that is paid to you will be tax deductible. Equity funds on the contrary will allow you to enjoy a stake in company, part in profits, and higher returns. Therefore, the investment decision solely lies on preferences and risk bearing behavior of investor along with latest market trends.

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Also Read: Investment Appraisal Guide: Methods & Techniques

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About the Author: Praveen Unnikrishnan

1 Comment

  1. Hi, very informative article.
    I am 28 years old and I am searching for good investment options. I just came to know about peer to peer lending as an emerging platform in India and wanted your views on that.

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