Why do Debt Mutual Funds have Lower Returns than Equity Mutual Funds?

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A mutual fund is an investment vehicle that pools money from several investors and invests it in securities such as stocks, bonds, and short-term debt instruments. Depending upon your risk appetite, financial goals, etc., you can invest in different types of mutual funds such as debt mutual funds and equity mutual funds. Debt mutual funds have lower returns as compared to equity mutual funds. To understand the reason behind it, let’s first learn about both these types of mutual funds.

Debt funds

  • Debt mutual funds, also known as fixed-income funds or bond funds, invest in government securities, corporate debentures, etc.
  • As debt instruments come with a fixed interest rate and maturity date, they are ideal for investors with low risk appetite.
  • By investing in debt mutual funds, you can earn a regular income at minimal risk. If you have major financial responsibilities, your investment portfolio should consist of debt funds.

Equity funds

  • Equity mutual funds are the investments that are made in stocks or equity of a company. This type of mutual funds can provide inflation-beating returns over a prolonged duration.
  • It is a great investment instrument for individuals seeking long term capital growth.
  • As the value of stocks fluctuates without prior warning, equity mutual funds are considered to be riskier in comparison to debt mutual funds.
  • Investors with fewer financial responsibilities can consider having an investment portfolio that is heavy on equity funds.

Why do debt funds have lower returns than equity funds?

The returns from an investment are directly linked to the risk involved. Debt mutual funds are considered less risky than equity funds. Thus, lower-risk investments like debt funds will offer lower returns unlike equity funds.

While equity mutual funds are risky in the in the short term, they can provide higher return over any other assets over a prolonged period. Thus, investors with high risk appetite should certainly consider investing in equity funds. On the other hand, though debt mutual funds provide low to moderate returns, it helps in capital protection. Thus, debt mutual funds can prove to be a great alternative investment for fixed deposits and savings bank account.

To sum it up, both these types of mutual funds help investors in meeting their investment objectives and financial goals. Before making any investment, you must analyse your finances carefully. You can consider seeking the help of a financial advisor for making a well-informed decision.

With the help of leading banks, you can invest in mutual funds online from the comfort of your home. Apart from buying and selling funds, you can also track the performance of your funds easily. Nowadays, most reputed banks have also launched their personalized mobile apps that make banking and investing even more seamless. So why wait? Analyse your risk-appetitive, list down your investment objective, and start investing in mutual funds with your preferred bank at the earliest.