Equity and debt mutual funds have become very popular in Indian market because investors are seeking security and stable rate of interest. The article provides detailed information about both funds so that people could understand their pros and cons. It is important to know the history of mutual funds, their various categories and vital aspects of equity as well as debt funds.
They are investments programs launched by various investors located in a region or across the world. Funds are managed by qualified and experienced fund managers who have proven expertise in increasing the wealth of the investors.
Indian mutual fund was introduced in the year 1963 according to the directives of the Government of India. A business entity called Unit Trust of India was created to handle the financial assets of the investors. The company operated as the only player in the mutual funds market for 25 years. In 1987, the government allowed the banks and life insurance corporation to launch their own investment funds. According to the latest survey conducted in the year 2013, the total value of Indian mutual fund assets is more than 100 billion dollars.
Regulation of mutual fund activities in India is undertaken by the organization called SEBI created in the year 1993.It designed comprehensive sets of regulations that were implemented in the year 1996. The mutual funds association is responsible for framing the rules that govern the sale and purchase of the units. Cost of investment in debt funds is far lower as compared to other types of funds because the management services do not incur huge expenditure.
NAV: Net asset value is the cost of the mutual fund units at the end of trading sessions. For redemption, a request must be submitted to the authorities.
Turn-around time: It is the time required to transfer money to the designated account when the request is processed by the fund manager.
Lock in period:Some schemes such as equity linked saving schemes require the investors to park the money for a minimum of 3 years. It is called the lock-in period.
For redemption of funds it is important to pay taxes and exit load charges. An investor must consult financial planner before selling off the mutual fund units.
Debt funds: Debt funds pertain to the investments in fixed income securities such as the bond as well as treasury bills. Monthly income plans, short term plans and fixed maturity income schemes are all part of the debt funds.
An individual can select funds based on the following criteria:
1) The investor must be assured that the principle borrowed should be returned along with the interest mentioned in the document
2) Amount must be paid within the specified time duration as promised.
Large organizations, governments and central government require money from the primary market to finance their operations. Therefore, they launch debt bonds periodically in the market in the form of debentures.
One of the most important advantages of debt based funds is the degree of stability they provide to the financial portfolio. They carry low risk in comparison to the equity funds, however in contrast to the liquid funds they are riskier. The debt funds play a vital role in assuring fixed rate of return and also secure the principle amount. If you are investing money for a period of 2 or 3 years, it is important to select the option of the debt funds because they provide higher rate of interest as compared to the liquid assets.
Equity Mutual funds:
Equity funds do not provide assurance to the investors regarding the interest rate or the duration of the investment. After the purchase of the equity fund, the investor becomes a shareholder of the company. Therefore, financial health of the organization will have a direct impact on the profitability or the rate of return on investment. An investor should diversify equity portfolio to minimize losses during recession in the stock market. Some of the threats to the equity funds include inflation that might erode the value of the money or a sudden crash of the stock market. If an individual is willing to invest for long term duration, an equity investment could prove to be a perfect option.
Equity funds could be segregated into different categories. They are as follows:
Large cap funds: It includes financial portfolio wherein a large portion of funds is invested in the organizations that have a large financial base. Large cap funds are stable and not prone to fluctuations in the market.
Mid cap funds: They provide excellent growth opportunities to the investors because the segment has higher growth potential than the large cap funds.
Equity or Debt funds: The better option:
Prior to investment in mutual funds, identify the objectives, risk profile, age and the lifestyle. Selection of funds depends on the choice to get a regular income, buy a house or saving money for the kid’s education.
If the security of investment is the primary objective, it is essential to select debt funds. They provide moderate rate of return with guarantee of the return of principle amount.
An investor with higher risk appetite will opt for equity funds which are unreliable but provide higher returns. For instance, equity funds could be a vital tool to generate money towards child’s higher education.
Investors with moderate risk appetite can chose a mixture of debt and equity portfolio to get the best deal. One of most important steps is to identify the asset class before proceeding ahead with the selection of the mutual funds.
People looking for short term investments must apply for bond schemes which are considered to be integral components of the debt funds. It will be an ideal choice to beat market fluctuations and ensure steady income to the investors.
To combat the risk of equity stocks, one should invest in industries spanning across various sectors and geographies. Moreover, the portfolio should consist of large cap, mid cap and small cap funds.