Are you confused between Equity, Debt, and Hybrid funds? Of course, you are! That is why you are here! No worries, in this differentiating guide, we will discuss the fundamental differences between these three.
Additionally, we will also discuss some other doubts that can arise in your mind. First of all, we need to understand the meaning of all three. This will assist you in understanding the differences among them better.
What are Equity Mutual Funds?
Equity funds are mutual funds that invest in a basket of equity securities (shares of companies). These funds are regarded as high-risk, high-reward funds because they hold the potential to generate higher returns, but they also come with higher levels of risk.
These funds are suitable for investors who are ready to tolerate more risk and volatility and have long-term investment goals.
Equity funds are further categorised based on the size of the companies. Such as
[Further, Read: Types of Mutual Funds]
What are Debt Mutual Funds?
Debt Mutual funds are considered low-risk, low-reward investments. This is because they invest in debt-related securities such as bonds, treasury bills, government securities and other debt instruments etc. promising a fixed income but lower returns.
These funds are best for investors who are sensitive to volatility and have a low-risk appetite. They provide the investors with a regular income and safety of capital.
While these funds are considered less risky than equity funds, they may still be subject to interest rate risk and credit risk. Some Examples of debt mutual funds are:
- Money Market or Liquid Funds
- Fixed Maturity Plan Funds (FMPs)
- Corporate Bond Funds
- Government Bond Funds
- Credit Risk Funds
- Dynamic Bond Funds
What are Hybrid Mutual Funds?
Hybrid mutual funds are also known as balanced mutual funds because they invest in a mix of equity and debt instruments. These funds aim to strike a balance between risks and returns.
These funds are best suitable for investors who wish to take moderate risks while participating in equity markets.
Difference Between Equity, Debt and Hybrid Funds
|Feature||Equity funds||Debt funds||Hybrid funds|
|Objective||Capital appreciation over the long term||Regular income and safety of capital||Balance between risks and returns|
|Risk Level||Higher risk due to the volatility in stock prices||Lower risk but still subject to interest rate risk and credit risk||Moderate risk due to exposure to both equity and debt instruments|
|Return Potential||Potentially higher returns in the long term||Lower returns than equity funds but more stable||Moderate returns, balancing both equity and debt|
|Time horizon||Long-term investment horizon||Short to medium-term investment horizon||Medium-term investment horizon|
|Best For||Investors with a high-risk appetite and long-term investment horizon||Conservative investors seeking regular income||Investors seeking a balanced portfolio|
|Asset Class||Stocks of companies||Debt securities such as bonds and government securities||Both equity and debt instruments|
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Equity vs. Debt vs. Hybrid fund- which is best?
Different types of mutual funds come with their own pros and cons. No fund is best for all investors. Each individual investor should choose a fund based on his risk appetite, investment goals and time horizon.
Are Debt Mutual Funds better for the short term?
Yes, They can be better for investors who have short-term investment goals. It is to be noted that they can generate steady income while simultaneously offering the possibility of growth in capital over the long term.