Donald Thompson
For those who are looking to learn more about mutual funds before they can start investing, there are 3 broad categories to look at. The 3 types of mutual funds in India are equity, debt, and hybrid mutual funds. The differences between these types of mutual funds are essentially based on returns generated, the risk involved, as well as each one’s sub-funds. Each type of mutual fund can be suitable for various investors, based on their preferences and goals.
So, which mutual fund is best? To know this, it is very important to be aware of each category and how they differ from each other. So, let’s get started with an insight into each of these funds and understanding the difference between them.
Equity funds
Equity funds are mutual funds that invest in stocks of different companies across different sectors. These funds can be sub-categorized into large-cap funds, mid-cap funds, small-cap funds, and multi-cap funds. This can be considered the best investment plan with high returns for those who have a high-risk appetite.
Debt funds
Debt funds focus on investing in a wide range of money market instruments as well as debt securities. These include debentures, commercial papers, treasury bills, certificates of deposits, government securities, and so on. Just like equity funds, there are various subcategories of debt funds too. These subcategories are short-term funds, ultra-short-term funds, overnight funds, as well as long-term funds.
Hybrid funds
Hybrid funds are for those who are looking to invest in both equity and debt funds. The aim of investing in both funds is to reduce the risk and increase returns. With hybrid funds, there is no fixed percentage when it comes to the allocation of funds. This will depend on the fund, fund manager, and the investor’s goal.
Here’s how these funds differ based on the following aspects:
Investment
Equity funds invest primarily in the stocks of various companies, debt funds invest in money market instruments and hybrid funds in both equity as well as debt fund instruments.
Returns
The returns of equity funds are dependent on how the market performs. As compared to equity funds, debt funds are more stable as they are not dependent on the market. The returns of hybrid funds are partly stable thanks to the debt funds and party dependent on market performance for the equity fund investment.
Risk
Equity funds carry the most risk since they are completely dependent on market performance. Debt funds are considered to be low risk, while hybrid funds carry a moderate level of risk since these funds are invested in both equity and debt. So, to answer the question as to where to invest money for good returns in India, investing in equity funds can result in high returns, but do note that this does involve higher risk as compared to investing in debt or hybrid funds.
Each of these three mutual funds can suit investors based on each one’s differing goals. Along with their financial goals, investors also need to consider the level of risk they can take before choosing a fund to invest in.
Reference links:
https://www.motilaloswal.com/blog-details/difference-between-equity-debt-and-hybrid-funds/20603
https://scripbox.com/mf/equity-vs-debt-vs-hybrid-mutual-funds/
Thomas
