Mutual fund companies offer a wide range of market-linked investment schemes through different types of funds. Debt funds and equity funds are the popular funds offered by mutual fund houses and financial companies that you could choose as per your investment goals and risk profile.
Both types of funds have their own pros and cons but choosing the right one could be difficult for you, especially if you are not aware of the key differences between both of them and the current investment market conditions. In respect of the same we have brought here the difference between debt and equity mutual funds and which one is better for you in 2025.
What are the Debt Funds?
Debt mutual funds are secured types of funds consisting the debt-based securities like bonds, government bonds, commercial papers, corporate bills, certificates of deposits, and other fixed-income securities. These are highly secured investable securities with shorter maturity periods.
Debt mutual funds are offered specially for investors looking to get assured and stable returns within a specified period. Debt funds are not affected by the fluctuations in the market, they can be affected by interest rate risks but only if the funds have very long-term maturity.
What are Equity Funds?
Equity mutual funds are stock market-linked investable schemes containing most of the underlying securities from the stock market. Mostly equities and derivatives underlying securities are included in the equity mutual funds to provide the direct benefit returns from the stock market fluctuations.
Equity mutual schemes are offered through open-ended funds with objectives to provide long-term investment opportunities with the facility to enter and exit any time from such schemes. However, it is suitable for high-risk investors, as the returns are closely tied to equity performance , which can be influenced by various factors such as market volatility.
Recommended Read: Invest in Mutual Fund Schemes
Difference between Equity and Debt Mutual Funds:
| Aspects | Debt Mutual Funds | Equity Mutual Funds |
| Types of Funds | In these types of funds, mostly debt securities, bonds and fixed-income securities are included to get stable but assured returns.
|
Most of the funds are invested in equities with a smaller portion in other securities to provide the main benefit from the stock market.
|
| Investment Objectives | This fund has been designed for investors looking to get stable returns with low risk with short-term investment objectives. | These funds are suitable for investors having long-term investment objectives with a motive to get returns from long-term capital gains. |
| Impact on Returns
|
The returns on debt funds are moderately affected by the change in the rate of interest in the money market. | The volatility in the stock market affects the performance and profitability of investing in such funds. |
| Level of Risk | The risk level of investing in debt funds is low as debt-based securities included in such funds can be only affected by the change in the interest rates. | The risk level is high, as the performances of equities in such funds are directly affected by market volatility, economic activities and stock performance. |
| Time Horizon | It has a maturity period of less than three years with multiple time horizons like six months, one year or two years as per the maturity of securities in funds. | The time horizon of these funds is very long usually more than five years and may be up to twenty-five years depending on your early stage of investing. |
| Tax Liabilities | The profit or income earned from debt funds is subject to tax under short-term capital gain tax if the investment is liquidated within 2 years and attracts long-term capital gain tax if profit is earned after 2 years. | Profits earned from investing in such funds are subject to a 20% short-term capital gains tax if the funds are liquidated within one year and a 12.5% long-term capital gains tax if they are sold after one year. |
| Tax Benefits | As per the current taxation rules in FY25, there are no deductions or tax benefits available for investing in debt mutual funds. | Invested through Equity Linked Savings Scheme (ELSS) in mutual funds are eligible to claim a tax deduction of up to Rs 1.5 lakh. |
Debt or Equity Mutual Funds, Which is better for you in 2025?
Choosing between debt mutual funds and equity mutual funds totally depends on your investment goals, risk capability and expectations of returns within a specific period. Debt funds are less risky compared to equity funds, as the previous one is more secure and stable in terms of returns and maturity. While the latter one is riskier as they are directly linked to the performance of the stock market.
The time duration of investing in equity, and mutual funds is long and has a lock-in period of three years or more, while in debt funds there is a short duration maturity period after which you can liquidate your investment. In debt funds, you will get stable returns but equity funds can give you much higher returns if the market moves positively.
Apart from that, incomes earned by investing in debt funds are subject to STCG if liquidated within two years, and LTCG if sold after two years. While in equity funds, your profitability will be taxed under STCG if sold within one year and considered under LTCG if investment sold after two years.
Conclusion
Based on your investment goals like time horizon, expected returns, funds availability and risk tolerance capability you can pick the right mutual funds. Equity mutual funds could be a better option when the equity market is likely to move with positive sentiments with stable economic conditions. But during an unstable economic condition or volatile market conditions, you should go with debt mutual funds.
In 2025, the equity market is likely to remain positive with steady economic growth providing you an opportunity to invest in equity funds. However, debt funds can give you safe and stable returns even in both types of economic conditions. Hence, you should diversify your investment and put your money in both types of funds in a certain ratio to get the best returns while ensuring the safety of your funds.
Recommended Read: How to calculate Mutual Fund Returns?
Learn More About Mutual Funds