Difference in Risk between Equity and Debt Mutual Funds

The reason we turn to investment options is that most of us aren’t satisfied with our existing salaries and hence look for solutions that can improve our financial condition gradually. Risk averse investors generally opt for traditional investment options like bank fixed deposits or public provident funds that offer low but fixed interest rate. However, investors who do not mind giving their investments a slightly aggressive approach opt for investment avenues like mutual funds.

Mutual funds are professionally managed funds where AMCs collect money from investors sharing a common investment purpose and strategically invest this pool of funds in accordance with the scheme’s objective. Mutual funds usually have a diversified profile as these investments are spread across various money market instruments like equity, debt, treasury bills, call money and government securities.

Mutual funds are further categories depending on several characteristics like risk profile, asset allocation, fund size, investment objective, etc. Equity mutual funds and debt mutual funds are two of the primarily popularized funds which a lot of investors consider for meeting their financial goals. Although both are mutual funds, certain things distinguish these two. Also, the risk tolerance required for investing in these two funds varies.

Today we are going to tell you how equity mutual funds are different from debt mutual funds in terms of risk and other attributes as well:

Parameters Equity Mutual Funds Debt Mutual Funds
Definition Equity mutual funds are those mutual funds which invest predominantly in equity and equity related instruments. Of the total assets, a minimum of 65 percent is invested in equity and equity related instruments. Debt mutual funds are those mutual funds which invest in fixed income securities like call money, treasury bill, corporate bonds, government securities, etc. Of the total assets, a minimum of 65 percent is invested in debt and debt related instruments.
Returns Returns from equity mutual funds depend on the market movements and are never guaranteed. That’s because equity investments are subject to market volatility hence, there is no fixed amount one will receive through these them. Debt mutual funds invest in fixed income securities and hence although there is no guarantee that the funds will give you fixed returns, they do offer lower returns as compared to equity investments.
Risk Since equity funds invest predominantly in equity and equity related instruments, they are considered to be a high risk investment. Debt mutual funds are said to carry low risk because they invest in securities that come with a maturity period of up to 91 days.
Lock in Except from ELSS which come with a three year lock in, no equity funds have any lock in period and you can withdraw or redeem your equity fund units according to your convenience. No debt fund has a lock in period and a lot investors add debt mutual funds to their mutual fund portfolio to give it some liquidity.
Ideal for Historically, mutual fund investments have given decent returns to investors who have held on to them for a longer period of time. Hence, investors with long term financial goals can consider investing in equity mutual funds. Debt mutual funds are usually opted by those who wish to meet short term goals like renovating one’s house, or making the down payment of their new car as these goals have a short investment horizon.

By now, you know that difference between equity and debt mutual funds not just in terms of risk but other attributes as well. However, if you are new to the world of investing and need further assistance, you can seek the help of a professional mutual fund advisor. Remember that it is your hard earned money that you are entrusting with someone, and it is better that you do enough research and invest in a scheme which might be able to help you achieve your ultimate financial goal.

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