GROW YOUR MONEY- INVEST IN SIP- SELECTING DEBT FUNDS OR EQUITY FUNDS – MAKE THE RIGHT DECISION

Hello Readers,

We are always confused while selecting SIP or mutual funds whether to invest in Debt funds or Equity funds. Both become jargon for non-financial people’s backgrounds.

To simplify things about both, I am explaining some salient features of both instruments while selecting a SIP for your benefit.

Debt mutual funds and equity mutual funds are two different types of mutual funds that invest in different asset classes.

Here’s a comparison between debt mutual funds and equity mutual funds:

Debt Mutual Funds:

• Asset class: Debt mutual funds primarily invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, debentures, and money market instruments.
• Risk and returns: Debt mutual funds are considered lower-risk investments compared to equity mutual funds. They offer relatively stable returns with lower volatility. The risk associated with debt funds primarily depends on the credit quality of the underlying bonds.
• Income generation: Debt funds focus on generating regular income for investors through interest payments from the underlying bonds. The returns are primarily driven by interest rate movements and credit quality.
• Investment horizon: Debt mutual funds are suitable for investors with a shorter investment horizon or those looking for capital preservation and regular income. They are often preferred by conservative investors or low risk takers.
• Taxation: The taxation of debt mutual funds depends on the holding period. Short-term capital gains (held for less than three years) are added to the investor’s income and taxed at their applicable income tax slab rate. Long-term capital gains (held for more than three years) are taxed at 20% after indexation benefits.

Equity Mutual Funds:

• Asset class: Equity mutual funds invest primarily in stocks or equity-related instruments of companies across different sectors and market capitalizations.
• Risk and returns: Equity mutual funds are higher-risk investments compared to debt funds. They offer the potential for higher returns over the long term but are subject to market volatility. The returns are influenced by the performance of the stock market and the underlying companies.
• Capital appreciation: Equity funds aim to generate capital appreciation by investing in fundamentally strong companies that have the potential to grow over time. Dividends may also be distributed by some equity funds.
• Investment horizon: Equity mutual funds are suitable for investors with a longer investment horizon (typically more than five years) who can tolerate market fluctuations. They are preferred by investors seeking long-term wealth creation.
• Taxation: For equity mutual funds, short-term capital gains (held for less than one year) are taxed at 15%. Long-term capital gains (held for more than one year) up to INR 1 lakh are tax-exempt, and gains exceeding INR 1 lakh are taxed at 10% without indexation.

It’s important to note that both debt and equity mutual funds have their advantages and considerations. The choice between the two depends on factors such as an investor’s risk tolerance, investment goals, time horizon, and overall asset allocation strategy. It is advisable to consult with a financial advisor or professional to determine the most suitable investment option based on your individual circumstances in my opinion people who are aged more than 50 or want to take less risk in their investments should always opt for Debt funds/Mutual Funds. You can also refer to https://www.mutualfundssahihai.com/en for more information on mutual funds or https://www.mutualfundssahihai.com/en/what-systematic-investment-plan-sip for more information on SIP’s.

Make correct and informed decision, stay safe, stay healthy