Investment, Mutual Funds

EQUITY VS DEBT VS HYBRID MUTUAL FUNDS

equity-vs-debt-vs-hybrid-mutual-funds

Many investors invest in market like a deranged person. If equity is doing well they invest it in equity and if they do not perform well they divert their investment elsewhere. The basic principle of investment is to invest when the price is low and exit when the prices are higher.

HYBRID FUNDS: 

We have Hybrid mutual funds which invest in equity and debt in a fixed proportion. They are done so to preserve the chance of acquiring more returns and to handle the disparity between the equity and debt. Under Hybrid mutual fund we have Equity oriented and Debt oriented hybrid funds. A hybrid mutual fund is an investment fund that offers diversified portfolio.

EQUITY ORIENTED MUTUAL FUNDS:

This is a type of mutual fund where the money pooled from the investors are invested more in Equity oriented instruments such as stocks. They are more volatile funds and the returns from them is greatly dependent on the performance of stock market. (They generally invest more than 65% of the fund in stocks )

DEBT ORIENTED MUTUAL FUNDS:

There is a disparity between Debt and Equity. Unlike equity, here the money amalgamated from investors is invested in fixed income sources which includes bonds, etc. We can corroborate (click here to know more) that the Debt oriented funds are well secured than the equity funds.

Let us try to compare the above based on certain common factors (Here we are not going to compare hybrid mutual funds because they are mixture of both equity and debt)

RISK:

Risk factor in Debt oriented funds is less because the investments are made in bonds which are less volatile. The fluctuations in the rate of interest is comparatively less.

Risk in Equity oriented funds is comparatively more because of the fluctuations in the stocks based on the changing market trends. They are more volatile and are influenced by factors such as inflation, tax rates, etc.

 

WHERE DO THEY INVEST?

Equity oriented funds are invested in stocks which are more volatile and are under the influence of market conditions. They need not invest entire amount pooled in stocks, if they invest more than 65% in stocks they come under equity funds.

Debt oriented funds are invested in government and corporate bonds which are more stable and less volatile. Here more than 65% of the amount pooled is invested in bonds.

RETURNS:

Equity funds can give you higher returns but not at constant rates. They execute bonhomie if stock market performs as expected, else there will be disparity in the returns.

Debt fund is acclaimed investment because of its steady and guaranteed returns. They are not volatile and are not influenced by the market trends. They are best investment option when the market is more volatile.

TAXATION:

When the debt funds are held for more than 36 months then they are taxed at 20 per cent.

Equity funds held for more than 12 months are taxed at 15 per cent.

RECOMMENDED TO:

If you want to have a little exposure to equity but want to be safe and risk free, then you might like Debt oriented funds

If you want great returns and are ready to accept moderate to high risk, go with equity funds.

Now when it comes to HYBRID MUTUAL FUNDS, they are the combination of both the equity and Debt oriented funds. But they make sure that the investment is secure by distributing the investment in proper proportion between the equity and debt.

So, my conclusion would be to invest in HYBRID MUTUAL FUNDS instead of investing in pure Debt oriented or pure Equity oriented funds, as it offers secure and guaranteed returns.

 

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CA Rachit Jain

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