Are you confused between investing in equity funds and debt funds to achieve your goals? If yes, you need to have clarity about the various types of mutual funds in India and their differences in terms of risk and returns. While debt funds invest purely in debt or fixed income instruments, equity funds predominantly invest in equity and equity-related securities. Both types of funds have different characteristics to match the return and risk requirements of investors. Another popular category of funds is a hybrid variety- the equity savings funds that invest in equity, arbitrage, and debt.
Equity and Debt Funds
As the name suggests, equity funds primarily invest in equity and its derivative products while debt funds invest in debt and money market instruments. A major difference between the two types of mutual funds is the duration for which you can invest. While you can invest in debt funds for shorter durations too, it is wise to invest in equity funds for the longer duration to get the desired returns and achieve financial goals.
The main difference between the two types of these two mutual funds is that equity has a higher risk profile than debt funds. Also, since risk and return are directly related the returns are more in the case of equity funds than the debt funds. Investors looking for investments that can offer good returns while balancing the risk associated with equity investments should consider hybrid mutual funds.
Equity Savings Funds are Hybrid Funds
Considered to be safer than equity mutual funds and more tax-efficient than regular debt funds, equity savings funds are gaining popularity amongst investors.
The main features of these funds are:
- This hybrid fund has to invest a minimum of 65% of its assets in equity and a minimum of 10% in debt securities.
- The fund managers can switch between equity and debt according to the market conditions and sentiments. This helps to contain losses and keep the risk involved at a moderate level.
- The fund invests in arbitrage opportunities by capitalising on the price fluctuations in the market.
- The fund’s equity portion maintains the investors’ purchasing power while the debt and arbitrage portion minimizes the risk of downward fluctuations in the market.
- Since the majority of the corpus is invested in equity and arbitrage opportunities, it is much more tax-efficient than the debt funds if it is held for more than a year.
- Returns on equity savings funds are taxable like any other equity fund.
Equity Savings Funds Vs Debt Funds
While both equity savings funds and debt funds are suitable for conservative investors, they differ in many aspects. Debt funds are low-risk investments with no equity exposure at all. Equity savings funds aim to balance the volatility of the equity markets by investing in debt as well as arbitrage opportunities. ESS is like a balanced fund with an added advantage of arbitrages. This makes the equity savings funds suitable for conventional investors who are seeking high returns from their investments over a shorter period.
Investors can invest in the equity savings funds via the SIP route to avoid the worry related to the timing of the market.