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Debt funds and equity funds: how are they different?
1. NOT EQUITIES, ONLY Debt Debt Funds only invest in Fixed-income securities like Bonds, Debentures, Money-Market Instruments, Government Securities, etc. These instruments work like a loan – you give them money in exchange for regular interest payments. They pay it off after a period called the ‘Maturity’ period.
2. INCOME FUNDS Debt Funds are also called as Income Funds. This is because Fixed-income securities give a regular interest payment. This can double up as regular income. The most popular Debt Fund is the Monthly Income Plan. Such Funds invest in securities that provide a regular interest or dividend payment. Fixed-Income Securities are the preferred option.
3. PROTECT YOUR CAPITAL Debt Funds are for people who seek capital protection in the short-term. This is why Debt Funds are often classified as Low or Medium-risk investments. This means the possibility of losses is low. This provides a measure of safety to your money. Equities, meanwhile, help you grow your money, i.e. capital appreciation
4. GO SHORT
Over the long-term, Equities have delivered higher returns than any other asset class. However, when you have a short-term or medium-term Goal like say buying a car in 2-3 years, you have a lower risk threshold. This is why it may be worthwhile to invest in Debt Funds for such short or medium-term Goals.
5. BEST OF BOTH
It is understandable if you do not want to expose yourself to high risks. However, there are no returns without some risks. This is why you can opt for Hybrid Funds. These are MFs which invest in both Equities and Debt. They offer you capital protection from Debt while also providing higher returns from Equities.
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