Debt and Equity Mutual Fund: Which One Will Be The Best For You?
Mutual funds investment always provides diversification. A new investor always feels puzzled about whether he/she will invest in debt or equity mutual fund. As an investor, one should know about the difference between either debt or equity mutual fund before investing. While both the fund seeks to deliver a potential return to the investor, but a comparative analysis will help you to understand, what suits best for you.
A debt mutual fund is a type of mutual fund that invests in shareholder’s money in fixed income securities such as bonds, treasury bills, money market instruments and liquid assets, whereas equity funds mainly invest in companies of different market capitalization, to generate higher returns. Let’s look at some of the major differences between them:
Nature of the Fund:
The most common difference between debt and equity is the way they invest in funds. Debt funds take money from the investor and invest mainly in fixed instruments like government securities, corporate bonds, non-convertible debentures and other highly related instruments. Equity Fund pooled money from the investor and then invest in equity shares of the company.
In terms of risk, equity funds are riskier as compared to debt funds. The debt funds are much safer as a major portion of their portfolio in government bonds, securities, and money market instruments.
Risk is always associated with returns. Higher the risk better will be the returns. Equity funds mainly invest in shares of different companies, hence carry bigger risk as well as better returns. On the contrary, a debt fund carries less risk, hence carry lesser returns. But the benefit of investing in debt fund is that one always gets the stable return and their capital is protected. In the period of the bear market, debt funds performed better compared to the equity fund. But debt funds are sensitive to the interest rate change.
Mutual Funds are taxed according to the time period of the investment. There are mainly two types of tax based on the time period, one is Long Term Capital Gains Tax and other is Short Term Capital Gains Tax.
Debt Fund: In the case of debt funds, if the gains on the debt mutual fund held for less than 36 months are taxed as short-term capital gains tax, whereas if the gains on the debt mutual fund held for more than 36 months are taxed as Long-Term Capital Gains Tax. In the case of short-term debt fund, the gains are taxed as per the income tax slab, whereas in the case of long-term debt fund, the gains are taxed at the rate of 20% after indexation.
Equity Fund: In the case of equity funds, if an investor sells his/her equity mutual funds before a year, then it is treated as short term capital gains tax. In that case, the gains are taxed at a flat rate of 15 percent. But if an investor sells his/her equity mutual fund after a year, then the returns are treated as long term capital gain. If the gains are less than Rs 1 lakh in a financial year, then there is no tax, but in case if the gains are more than Rs 1 lakh in the financial year, then it will be taxed around 10 percent.
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*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.