Investing in the right type of fund, at the right time and for the right duration is important for earning good returns on each investment. Even a high return earning fund may fall short if invested for a wrong duration of time. This basic notion stands true when it comes to equity and debt funds.
Equity funds are the type of mutual fund where an investor primarily invests in stocks and the returns that they earn on the funds are further invested in equity-oriented instruments. On the other hand, debt funds pool money from the public and make investments in the fixed income instruments like the corporate bonds, government bonds and the non-convertible debentures among others.
Both types of funds have their own sets of merits and demerits but which one of them can be deemed suitable for the long haul?
Why should investors consider equity mutual funds over debt funds in the long run?
The following hints at why equity fund is a better choice for the investors in the long run:
Associated risks: The movement of the market controls the flow of the returns of an investor. Though equity has a higher risk factor than the debt funds, a good equity scheme will enable its investors to distribute the risks through its feature of diversified investment. This minimises the impact of risk and ensures a steady flow of returns even in a volatile equity market. While debt funds may be deemed safer than the equities, they are not entirely free of risk. Moreover, debt funds are subjected to the fluctuating rate of interests and its investments take long to convert.
Tax: Tax is applicable to all types of funds; even when it comes to redemption, a certain rate of tax is applicable to most of the funds.The rate of tax applicable on the debt fund that has been held for over 36 months is a sharp 20% with indexation, while a sharp 15% tax is charged on the long-term equity fund that has been kept over 12 months or less. In the long run, the investors of equity mutual funds have to pay a lower rate of tax when compared to the tax paid by the debt fund investors.
Returns on investments: When an investor invests in a fund, the main objective that drives him/her is the returns on their investments. A debt fund investor earns a steady flow of return but within a constant range, while equity fund generates higher returns over the long run and is good for creating a corpus fund. The rate of returns is higher for the equity funds in a booming market condition, while the debt funds continue to offer constricted returns in a volatile market.
Find out from us how you can invest in a good equity fund that distributes the risks of the investment and earns you higher returns in the long run. Learn from us in detail about the advantages of equity funds over debt funds in the long run.