Making a choice between equity and debt mutual funds for long-term goals

Mutual funds are quickly becoming a preferred investment choice for millennials.

The transparency, low costs, and the potential for returns higher than inflation are what make mutual funds a popular option among youngsters.

For starters, here’s how mutual funds work. Investors aim to earn a positive return and pool their money into a mutual fund. Broadly speaking, mutual funds fall into two main categories: equity and debt, representing the two primary asset classes. The mutual fund then invests in various assets, such as stocks, bonds, or gold, to generate returns for the investors. Funds that primarily invest in stocks are known as equity or growth funds, while those that focus on debt assets are referred to as debt or income funds.

Mutual fund schemes that invest 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 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 earn interest from the fixed-income securities they are invested in.

Let’s explore the basic features of each to gain a better understanding.

Equity mutual funds