The main difference between equity and debt mutual funds is that equity mutual funds invest in equities and related securities, which have a higher level of risk, while debt mutual funds invest in government securities and debt securities, which have a lower level of risk.
This article covers:
- What Are Debt Funds In India
- What Are Equity Funds?
- Equity Vs Debt Mutual Funds
- Best Equity and Debt Funds in India
- Equity Fund Vs Debt Fund- Quick Summary
- Equity Fund Vs Debt Fund- Frequently Asked Questions
What Are Debt Funds In India?
Debt funds in India are the type of mutual fund scheme that invests in government bonds, debentures, and money market securities such as CPs, CDs, etc. They are also called bond funds and are less volatile and provide much more stable returns. They are ideal for risk-averse investors and are the best alternative for those who want to invest in fixed-income instruments such as FDs.
The expense ratio of investing in debt funds is very low, which is fixed by SEBI at up to 2% of the fund’s AUM (assets under management). The earnings of a debt fund are of two types: one is dividend earnings, which a mutual fund will declare, and the other is capital gains, which an investor will get from the difference between the purchase price and the selling price of the particular debt fund.
The dividend earnings and STCG (which is up to 3 years in this fund) are taxed according to the investor’s income tax slabs in which they are liable to pay the tax. For example, if the debt funds provide a profit of ₹1 lakh after selling it within 3 years of purchase and the investor’s applicable income tax slab rate is 20%, then the investor has to pay this tax and any applicable cess or surcharge.
From 1st April, 2024 there is a change in the taxation rule on the LTCG earnings from the debt funds. The LTCG earnings which are earned on the debt funds when they are sold or redeemed after three years will be taxed according to the investor’s income tax slabs and this earning is added to the total income. Also, there will be no indexation benefits provided to the investor which are earlier there on the LTCG taxation.
What Are Equity Funds?
Equity funds are the type of mutual fund schemes that invest a minimum of 65% of the collected funds from various investors in equities and related securities. To put it simply, equity funds invest primarily in the listed stocks, and they provide benefits to small investors who are not able to invest in them. They are best for new investors who are just looking to invest in stocks and don’t have the expertise in that.
Both capital gains and dividends are taxed differently. The dividend earnings are taxed according to the investor’s income tax slabs in which they are liable to pay the tax. The capital gains are taxed based on the holding period of a mutual fund’s units.
If the holding period is less than one year, then this is short-term capital gains (STCG), and the earnings will be taxed at the rate of 15%. For example, if the STCG is ₹75,000, then the investor has to pay ₹11,250 as STCG tax.
If the holding period is more than one year, then this is long-term capital gains (LTCG), and the earnings of more than Rs 1 lakh will be taxed at the rate of 10%. For example, if the LTCG is ₹1,25,000, then the investor has to pay ₹12,500 as LTCG tax, and if the LTCG is ₹95,000, then the investor doesn’t have to pay any tax.
Equity Vs Debt Mutual Funds
The biggest difference between equity and debt mutual funds is that equity funds are risky because of the volatility from underlying equity stocks, whereas debt mutual funds are less risky because they invest in fixed-income securities.
| S. No. | Points of Difference | Equity Funds | Debt Funds |
| 1. | Portfolio Holdings | The equity funds invest at least 65% of their corpus in listed stocks. | The debt funds invest their corpus into fixed-income instruments such as bonds, G-sec, CDs, CPs, TBs, etc. |
| 2. | Earnings Capacity | The earning capacity of these funds is high enough to beat inflation in the long term. | The earnings capacity of these funds can range from low to medium. |
| 3. | Investment Goal | The investment goal is wealth generation and achieving long-term goals. | The investment goal is capital protection and achieving short-term goals. |
| 4. | Expense Ratio | The expense ratio is higher because these funds are generally actively managed. | The expense ratio is lower because these funds are generally not actively managed. |
| 5. | Market Analysis | There is a need to analyze the market before investing in these funds because they are highly volatile. | There is no need to analyze the market to invest in these funds because they are less volatile and the focus should be more on the investment duration. |
| 6. | Duration of Investment | The equity funds are suitable for long-term investments such as for five years. | The debt funds are suitable for short, mid to long-term investments. |
| 7. | Tax Saving Schemes | The ELSS mutual funds is a tax saving scheme. | There are no tax-saving schemes available. |
| 8. | Capital Gains Taxation | The STCG (less than one year) is taxed at the rate of 15%, and the LTCG (more than one year) is taxed at 10% if more than ₹1 lakh rupees. | All the earnings from the debt mutual funds are taxed according to the investors’ income tax slabs and there will be no indexation benefits on the LTCG earnings. |
Best Equity And Debt Funds In India
Here is the list of the 10 best equity funds to invest in 2024:
| S.No. | Equity Fund Name | NAV (in ₹) | AUM(in ₹ crores) | 1Y Return | 3Y Return | 5Y Return |
| 1. | Quant Tax Plan | ₹244.51 | ₹2,692 | 9.11% | 37.85% | 21.63% |
| 2. | SBI Bluechip Fund | ₹67.51 | ₹34,309 | 9.27% | 17.41% | 11.45% |
| 3. | PGIM India Midcap Opportunities Fund | ₹47.74 | ₹7,617 | 6.92% | 31.99% | 18.73% |
| 4. | Parag Parikh Flexi Cap Fund | ₹52.19 | ₹29,345 | 4.16% | 23.7% | 17.02% |
| 5. | Motilal Oswal Midcap Fund | ₹56.75 | ₹3,663 | 20.76% | 24.01% | 16.65% |
| 6. | Axis Midcap Fund | ₹74.27 | ₹18,756 | 3.43% | 18.43% | 16.15% |
| 7. | Canara Robeco Equity Tax Saver Fund | ₹122.95 | ₹4,576 | 5.31% | 18.7% | 15.31% |
| 8. | ICICI Prudential Bluechip Fund | ₹72.91 | ₹34,640 | 8.4% | 18.28% | 12.09% |
| 9. | UTI Mastershare Fund | ₹200.69 | ₹10,434 | 3.12% | 15.72% | 11.37% |
| 10. | Kotak Bluechip Fund | ₹416.51 | ₹5,265 | 8.28% | 17.26% | 12.6% |
Note: Data as of March 3rd, 2024
Here is the list of the 10 best debt funds to invest in 2024:
| S.No. | Debt Fund Name | NAV (in ₹) | AUM(in ₹ crores) | 1Y Return | 3Y Return | 5Y Return |
| 1. | Aditya Birla Sun Life Medium Term Fund | ₹33.97 | ₹1,643 | 21.75% | 13.71% | 8.67% |
| 2. | UTI Bond Fund | ₹66.21 | ₹284 | 11.52% | 9.75% | 4.47% |
| 3. | Nippon India Ultra Short Duration Fund | ₹3,715.6 | ₹4,974 | 5.76% | 6.43% | 5.9% |
| 4. | ICICI Prudential Corporate Bond Fund | ₹25.84 | ₹16,683 | 5.69% | 6.39% | 7.41% |
| 5. | HDFC Floating Rate Debt Fund | ₹42.1 | ₹14,787 | 5.57% | 6.1% | 6.94% |
| 6. | Sundaram Low Duration Fund | ₹3,103.8 | ₹391 | 5.33% | 4.58% | 1.83% |
| 7. | Axis Corporate Debt Fund | ₹14.83 | ₹3,580 | 4.62% | 6.46% | 7.26% |
| 8. | SBI Magnum Medium Duration Fund | ₹45.44 | ₹7,138 | 4.37% | 6.35% | 7.93% |
| 9. | DSP Government Securities Fund | ₹82.7 | ₹421 | 3.99% | 5.79% | 8.76% |
| 10. | IDFC Banking & PSU Debt Fund | ₹21.13 | ₹14,318 | 4.02% | 5.76% | 7.58% |
Note: Data as of March 3rd, 2024
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Equity Fund Vs Debt Fund- Quick Summary
- The difference between equity and debt mutual funds is that equity funds invest in listed stocks, which are more volatile, whereas debt funds invest in debt and bonds, which are less volatile.
- Debt funds are the type of mutual funds that invest in government securities, bonds, etc. which provide safer returns.
- Equity funds invest in listed stocks of companies that are very risky and can provide higher returns.
- The earnings capacity of equity funds is generally higher than debt mutual funds.
- Some of the best equity and debt funds are Quant Tax Plan, SBI Blue Chip Fund, Aditya Birla Sun Life Medium Term, Sundaram Low Duration Fund, etc.
Equity Fund Vs Debt Fund- Frequently Asked Questions
The difference between equity and debt mutual funds is that equity funds invest in listed stocks, which are risky, whereas debt funds invest in fixed-income instruments such as bonds, G-sec, etc., which are less risky.
Equity funds are better than debt funds for investors who can take high risks and want to invest for a long period to maximize the returns.
Debt funds are safer than equity funds because their portfolio holdings include government securities, bonds, and fixed-income securities, which provide stable returns.
The best fund type is the equity fund for high-risk appetite investors and those who want higher returns. Debt funds are better for those who want low-risk and stable earnings.
The right time to invest in debt or equity is that in debt, you can invest at any time, and in equity, you should invest when the market is low.
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