Equity and debt funds are both in competition to become an investor’s choice. Investing with both have some pros and cons, which should be known by an investor. There is a lot of difference between the two. While debt funds invest in fixed income securities, equity funds are known as a stock fund as stock funds as they invest primarily in stocks.
Here are a few points to briefly know what the difference between equity and debt funds is.
- Nature of the fund:
This is the basic criteria to differentiate between equity and debt funds. In the equity fund, the money of investors is invested in the equity; this can be better understood as stocks. Whereas, debt funds deal with investments in government bonds or corporate bonds. - Risk Factor:
The risk factor involved with investments in equity funds is different than that of debt funds. Generally, it is lower in debt funds as they offer a much secure investment through government bonds. In case of equity funds, the NAV depends upon the market prices. So interest rates will vary accordingly. While in debt funds the interest rate change affects the NAV of the fund. - Tax Liabilities:
The tax liabilities of the debt fund are at a fixed rate which is mostly 20%, or the tax is cut from the total income from the fund.
Equity funds, unlike debt funds, are free from tax liabilities if they are for a long-term. However, for short-term equity funds, the taxation is at a rate of 15% flat. - Return:
The return of equity funds is good at a long-term, but the volatile market may give less or negative results. On the other hand, debt funds give constant results and are a better option to invest in the volatile market.
Hence, now you know what is the difference between equity and debt funds. These differences are essential to be known by an investor before he raises money in any of them.
