Debt fund and equity fund , what is the difference?

Which of these funds has good returns ??

Debt mutual funds pool money and they invest in fixed income generating securities such as corporate bonds, government securities, treasury bills, money market instruments of varying maturities. Returns are generated from the interest earned and the appreciation/depreciation of the securities.

Different types of debt funds
Liquid Funds: As the name suggest these funds are highly liquid. They invest in securities whose maturity is not more than 91 days. This makes them relatively risk-free. Since they fluctuate very less they are very useful when it comes parking your funds for the short term instead of letting your money lie in SB account and they offer the same liquidity and higher returns*.

Ultra short-term funds
Unlike liquid funds, these funds invest in securities of maturities ranging from a week to 18 months. They have a longer view compared to liquid funds.

Short-term funds
Funds which invest in securities with maturities up to 3 years.

Income funds
These are funds which invest in a mix of securities including government bonds, certificates of deposits, corporate bonds and money market instruments. These funds are actively managed based on the interest rate cycle. They try to generate returns in both a rising or falling interest rate environments.

Gilt funds
These funds invest only invest in govt securities. These bonds are issued by the government and hence carry no default risk. This makes it attractive to risk averse investors.

Dynamic bond funds
These are actively managed funds which invest in various debt securities with no restrictions on term, maturity or allocation. The fund manager makes the call depending on the interest rate cycle.

Monthly income plans (MIPs)
Contrary to what the name says these schemes don’t generate fixed monthly income. These funds invest a majority of the funds are allocated in debt instruments and the remaining in equities. A majority of the schemes generate income in the forms of dividends. The quantum of dividends and the frequency is at the discretion of the fund.

Equity funds
Like the name says these funds invest in stocks and at any given point of time the fund manager may also choose to hold a portion of the corpus in the form of cash. When you buy and sell these funds the price you pay is called Net Asset Value (NAV). The NAV of each fund depends on how the stocks the fund has invested in perform.

Types of Equity MFs

Large cap, Mid cap, Small cap and muti-cap funds
These funds invest in stocks based on market capitalization.
Although there is no standard rule broadly this is how stocks are broadly categorized
Large cap > 25K Cr
Midcap = 12 - 25K Cr
Small cap = 2 -12K Cr
Microcap = Less than 2K Cr

Diversified funds
These funds invest across market capitalizations and market caps.

Sectoral funds
These funds invest in stocks of a sector, ex Pharma Fund.

Thematic funds
These funds invest based a particular theme. Ex.Logistics funds, MNC funds.

Index funds
These are passive funds which replicate the composition of an index. For example, a Nifty 50 fund will consist of the same stocks in NIfty 50 with almost the same weightages. Since these funds are passive funds they are relatively cheaper compared to other funds.

Equity-linked Saving Schemes
These are same as diversified funds but with a tax benefit under Section 80C. These funds will also have a lock in period of 3 years, meaning you cannot exit the fund under 3 years.

No matter what kind of a fund you invest in, always invest in direct mutual funds. Check out this post to know why

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Thanks for the detailed info, Bhuvi