The Difference Between Equity, Debt & Balanced Funds

All funds are not created equal. Each caters to the needs of a customer at a specific time and need in their life. Just as we change the vehicles we use across our lifetime, so too should we re-assess our savings and investment priorities as the years pass. All mutual funds mobilise money from their customers and grow them using a variety of investment routes depending on the objectives of the fund and its target audience. Equity, Debt and Balanced funds are segregated by their chosen asset allocations.

Equity Funds, as the name implies, invest primarily in stocks. They relieve us of the market-trend tracking needed to profit from investing in shares. But they are still prone to the peaks and troughs of the equities market. In that respect, equity funds represent high-risk = high-returns (and vice-versa).

Which brings us to Debt Funds. On the more conservative end of the investing spectrum, these funds invest in debt instruments such as Government of India bonds, state government bonds, corporate debt, public sector undertaking (PSU) bonds, treasury bills, etc. And logic follows, that conservative risk, would naturally yield conservative returns (or losses) compared to Equity markets. Debt funds are like loaning your money out, to proven and trust-worthy borrowers, who pay ‘interest’ on the loaned amount. Earnings from debt funds come in 2 forms, dividends/interest, and earnings from the sale of your unit/s. Taxation impacts the earnings too and need to be accounted for when making the purchase decision.

Our last contender, the Balanced Fund (also called Hybrid fund) is an amalgam of the earlier two. Balanced Funds offer customers the chance to invest in a pre-set mix of both asset classes – debt and equity. Technically, the security of the first, is meant to offset the volatility of the second. So, the mix should meet your desired ratio of risk to security, and the fund should be accordingly equity-oriented or debt-oriented. A well-managed hybrid fund’s portfolio is continually rebalanced by the fund’s manager to maximise earnings while maintaining the proportion of asset allocation mandated.

Mutual Funds, by their very nature, offer you diversification in how you invest your money – based on:

- scheme structures – close or open-ended

- investment objectives – growth, fixed or balanced funds

- asset allocation – equity, debt or hybrid funds,

- and even by sectors or themes

Knowing the distinction between all the various instruments out there, and what they can do for you (based on your life-stage needs) is the key to optimising your wealth creation. Stay in touch with your investment advisor and keep them updated about your financial goals.

Happy Investing!

Happy Banking!

NOTE WORTHY : "All mutual funds mobilise money from their customers and grow them using a variety of investment routes depending on the objectives of the fund and its target audience. Equity, Debt and Balanced funds are segregated by their chosen asset allocations."

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