Equity Fund or Debt Fund: Which is better while investing for financial freedom?

By Sunil Dhawan3 days ago

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Equity Mutual Fund or Debt Mutual Fund - Which is Better: Equity funds work well over long term while debt funds suit short to medium term goals.

There are lots of factors to consider before deciding which category of mutual funds to invest in.

Debt Mutual Funds vs Equity Mutual Funds: The purpose of saving money is to meet our financial goals in life. Savings translate into investments when you earmark them towards a goal with the objective of earning a higher return. The stage in your life when you have accumulated adequate savings or assets that can help you sustain your living expenses without having to depend on any regular income is what is called financial freedom. Needless to say, your life goals such as children’s education, marriage, home buying will have to be met before you achieve that stage. To meet your long-term goals, the role of two asset classes are prominent – equity and debt. It’s the combination and the optimum usage of both of these assets that will help you achieve financial freedom in your life. There are several other aspects of financial freedom. Here we touch upon the investing part of it. And, with most of us, especially those who are young, this is possible by making use of equity funds and debt funds.

But, if you start with asking which is a better debt fund or equity fund, the beginning will not be in the right way. Both, debt and equity funds have different roles to play. As a lay investor, one person needs to understand their objective. If the objective is high return and the investor is willing to take high risk in equity. If the idea is to protect capital then debt is the option. It depends on the personal objective and age. I would recommend lower the age, higher the risk should be there because in the long run, equity will surpass returns in terms of all asset classes whereas when the age is very high like above 50 or so then the debt should be the preferred option because at that point of time, we should not play around with the hard-earned money, says Rachit Chawla, CEO & Founder, Finway FSC.

Mutual fund schemes that invests at least 65 per cent of investor’s funds into the equity shares of companies are called equity mutual funds. The returns from such funds with equity as its underlying asset are volatile in nature and hence ideal for long-term investing. Debt funds invest in fixed income instruments such as government securities or corporate bonds. In addition to any capital appreciation they also earn interest from the fixed income securities that they are invested in.

Equity funds work well over long term while debt funds suit short to medium term goals. Your own risk appetite also needs to be considered but ideally if you are young, opt for equity funds. Retired and senior citizens also need exposure in equity funds to take care of inflation but a lower exposure than youngsters will suffice. There are lots of factors to consider before deciding which category of mutual funds to invest in.

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