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Debt funds vs. Equity funds: Which is a better investment option?

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Equity or debt: This is an essential question investors ask when they venture into mutual funds. This is because equity and debt funds are two popular mutual funds available. Both types of funds are excellent for investing and earning money. But if you have to choose between the two, here are some factors you could consider.

What are equity funds?

Equity funds invest a significant portion of money in company stocks. The primary objective of these funds is to grow your capital at a quick rate. Since the returns are linked directly to the stock market, the risk of investing in equity funds is higher than debt funds. Equity funds are well suited for investors interested in long-term growth. Based on your goals, you can consider different types of equity funds for the future. Fund types include growth funds, aggressive growth funds and diversified equity funds among others.

A growth fund focuses on increasing investor wealth by investing in companies with high potential for growth. Aggressive growth funds also have the same end goal but their aim is to maximise capital gains quickly. As a result, these funds are exposed to maximum risk as they invest in shares with high volatility. It is a good idea to invest in these shares if you have sufficient experience in the market. In contrast, diversified equity funds invest in a wide range of companies to lower the risk exposure.

What are debt funds?

Debt funds primarily invest in fixed income securities such as government securities, corporate bonds, debentures and other money-market instruments. These funds offer yields on a regular basis; mainly, through the interest the fund earns. And while debt funds are generally considered relatively less risky, there is still a possibility that companies which take debt from investors may not be able to repay the principal and interest at a later date. To avoid such issues, mutual fund regulator SEBI has issued a mandate that only companies with good credit be allowed to raise debt.

Debt vs. Equity mutual funds: Which is better?

Both debt and equity mutual funds are excellent investment options; hence, you may want to know, which fund would help attain your investment goal in the best way possible.

This is because both funds have different investment horizons, objectives and risks. If you are looking to generate income in the short term, it is advisable to invest in debt mutual funds. However, if you want to achieve long-term financial wealth, you may want to consider putting your money in equity mutual funds. Equity funds offer higher returns (10-15%), and when invested for longer periods, the risk exposure can significantly reduce.

Conclusion

Investing in mutual funds is unlike the climax of Oscar winning movie ‘Sophie’s Choice’ where you have to choose between one fund or the other. In fact, you can invest in both debt and equity mutual funds to reach different financial goals in a timely manner.

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