Difference Between Equity vs. Debt Mutual Funds

Equity Mutual Funds

Equity funds invest mainly in stocks and shares of companies. This is further classified based on geography (domestic or international), company size, pattern of investment (active or passive), whether the stocks are chosen at random or are thematic/sector-based, etc. Equity funds are high-risk because of the inherent market volatility of stocks, though a diversified portfolio – in which you choose to invest in different stocks with different risk levels – will mitigate the risk considerably.

Equity funds are also valued at NAVs, but the periodic return values are what determine the profitability of an equity mutual fund. Equity funds are high-return if you have chosen high-value or steadily rising stocks. Returns on equity funds depends on the amount of risk you are ready to take with your stock portfolio, and the growth of the stocks in your portfolio.

Difference between Debt and Equity Funds

The points mentioned below are what makes debt and equity funds different from each other:

• Debt funds invest in secure investment vehicles such as government bonds and securities, while equity funds invest in company stocks.
• Debt funds are a very low-risk investment option while equity funds are high-risk because of stock market volatility.
• Debt funds usually generate low or fixed returns, while equity funds, if invested wisely, can generate high returns.
• There are little chances of loss in debt funds, while equity funds could run into losses in case any of the stocks invested in, crashes or gives negative returns consistently.
• Debt funds (purchased on or after 1 April 2023) are considered short-term capital assets if held for less than 24 months; equity funds are considered short-term capital assets if held for less than 12 months (as of July 2024).
• Debt funds become long-term capital assets after 24 months of ownership; equity funds become long-term capital assets after 12 months of ownership.
• The tax on short-term capital gains on debt funds is as per the income tax slab you fall under, while that on equity funds is a flat 20% (as of July 2024).
• For debt funds purchased on or after 1 April 2023, gains are taxed at the investor's income tax slab rate regardless of holding period. For units held more than 24 months, a 12.5% LTCG rate (without indexation) applies as of July 2024. For equity mutual funds (held more than 12 months), long-term capital gains up to Rs.1.25 lakh per year are exempt; gains above Rs.1.25 lakh are taxed at 12.5% without indexation (as of July 2024).

As an investor, when you buy a mutual fund, your risk appetite and investment objective will determine whether you should go for a debt fund or an equity fund. Debt funds are recommended to people who are looking for their investments to give them a fixed income, while equity funds are suitable for people who aim for investment growth and wealth creation. While debt funds are good for shorter-term investments of up to 5 years, equity funds give better returns on longer-term investments of 5 to 7 years.