Equity funds or debt funds? Find the right investment option.

The recent investment trends clearly show increased interest of investors towards mutual funds. And why not? Mutual funds are one of the most dynamic investment options available today. It is basically a fund that collects money from investors and creates a pool out of it. The money is then used to diversify into several different avenues. Diversification of funds leads to lesser risk and higher returns. The two most popular types of mutual funds are equity funds and debt funds.

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The difference between equity funds and debt funds:- Equity funds are the funds that only invest in stocks of the company. Even though it is diversified, the diversification is limited to equity sector. The main objective of equity funds is to provide long-term growth with decent returns. Returns generated by equity funds are known to beat inflation as equity fund managers usually invest in stocks that have a proven record of beating inflation. Equity fund investment is ideal for investors willing to invest for a long period of time and have high risk taking capacity.

On the other hand debt fund is a much safer option, it invests in avenues that generate a fixed amount of returns for example- bonds, debentures, commercial papers, fixed deposits.  These types of funds are perfect for investors with low risk taking capacity, but as the general investment, the rule goes lower the risk lower the returns.

How to decide on the right investment option?

To decide whether to invest in equity or debt funds will completely depend on your investment objective. Check out below factors before deciding on your investment plan.

Duration of the investment: Select the time period you will need your money in. If you need it for 5 years or less then opt for debt funds whereas if you are up for investing for a longer period of time then equity funds are the right option for you.

The expectation of returns: Debts funds generate on an average of 8-10 % of annual returns and equity funds generate more than 15% every year.

Risks associated: Market related risks are associated with both equity and debt mutual funds. But for investors who are willing to take risks for wealth generation, it is advised to invest in Equity mutual funds.

 

 

Equity Funds a Boon for Portfolio

An equity fund makes investments in stocks or equivalent securities. Each stock represents a share in the company. They are mostly utilised to purchase a portfolio of stocks. Through the purchase of these stocks, one can receive an indirect ownership of a large bunch of securities. These funds are especially convenient for those who wish to do business without setting up their company, by investing through local companies. The objective of these funds is long-term growth. These funds may also aim at the size of the company before making an investment. Take a look at some of the advantages associated with equity funds:

Diversification: Equity funds can be diversified simply and require a minimal initial investment. Therefore, as an investor, you can purchase different stocks of different companies. The advantage is that is the price of a stock falls, the other stocks can cover up for the loss.

Dividend: If you invest in blue chip companies, you can receive a regular income which comes in the form of dividends. Such companies often pay regular dividends irrespective of good or bad financial times. Since every company has a different cycle, as an investor, you can expect some amount of earning each month.

Capital Appreciation: When a company makes a profit, it chooses to reinvest it in order to expand it through product developments or growing market share. This leads to an increase in the market price of the stock, thereby, ensuring capital appreciation for investors.

Professional Management: None of the investments come with guaranteed success which is professional experts handle mutual funds. Therefore, even if you do not possess knowledge about a certain stock, your fund manager will help you make the right decision related to your investments.

No Brokerage: Most of the fund houses charge a certain fee, brokerage or commission in exchange for their services. In an equity fund, it is possible for an investor to avoid brokerage fees. This is one of the main advantages associated with an equity fund.

Liquidity: As stocks are traded across the world, they are highly liquid in nature. It also means that as an investor you can easily sell your stock when you want. Usually, you can receive your money within a week of the sale of the stock.