What are Equity, Debt, and Balanced Mutual Funds? Which one is for you?
While there are many different types of mutual funds available in India, the equity, debt and Balanced Mutual Funds are the most popular. What makes these funds so popular among investors? Let us have a detailed look at this post.
Mutual funds were introduced in India in the year 1963. Since then, the industry has grown by leaps and bounds, and there are now more than 10,000 funds to choose from. If you are new to mutual funds or have been investing for some time, you might already know that these funds are divided into several categories. Among all the different types of mutual funds, it is the equity, debt and balanced funds that are the most popular.
Let us have a look at what these funds are and whether or not you should invest in them.
The Balanced Mutual Funds invest in equity as well as debt instruments. If you are tempted by the growth potential of the equity market but don’t want to lose the safety cushion offered by the debt funds, a balanced fund can be a great option for you. In simple words, these funds are a combination of equity and debt funds.
Depending on the investment, these funds are usually divided into two categories- conservative and aggressive. In conservative funds, the major part of the investment is done in debt instruments and aggressive funds, the major part of the investment is done in equity instruments.
Equity Mutual Funds
In simple words, equity funds invest your money in stocks of companies. They are also known as stock funds and are categorized on the basis of their holdings, like large-cap funds, mid-cap funds, and small-cap funds. The risk relies on the type of equity fund you select. For instance, the large-cap funds are usually known to have lower risk as compared to mid-cap and small-cap funds.
Apart from these, there are thematic funds too, which invest in stocks of a specific sector, like IT, pharmaceutical, banks, etc. If you are looking for tax savings, there are ELSS (Equity-Linked Savings Scheme) funds which usually come with a lock-in period of 3 years.
The debt-based funds invest in many different types of securities depending on the investment strategy of the fund. They usually invest in a combination of fixed income or debt securities, like corporate bonds, Government securities, treasury bills, money market instruments, etc. of different time-based horizons. These funds usually offer fixed interest rate and have fixed maturity date.
The returns from a debt fund consist of the appreciation or depreciation of the capital and the interest income. Just like equity funds, the debt funds too, are divided to suit the investment horizon and risk-bearing ability of the investor. However, as compared to the equity funds, the debt funds are known to be much safer and ideal for conservative investors.
All the three types of funds mentioned above come with their own share of benefits and drawbacks. So, focus on creating a balanced portfolio rather than focusing on a single type of mutual fund. And just like any other investment, make sure that you try to know as much as possible about the mutual funds, fund houses, and the scheme you are planning to select.