Should You Invest in Both Equity & Debt?

There are literally hundreds of mutual funds schemes out there for investors to choose from. Now it is true that those who are new to the world of investing, for them picking the right mutual fund/s can become a task in itself. That’s because going through hundreds of mutual fund schemes, their past performances, category performance, expense ratio, etc. is not just tedious, but it can get really confusing as well. This is why financial advisors ask investors to make a financial plan so that making an investment decision becomes less challenging.

However, even before you proceed further to pick a mutual fund scheme, you need to know whether you have to invest in an equity scheme or whether you need to put your hard earned money in a debt scheme.

What is the difference between a debt scheme and an equity scheme?

Debt schemes invest in fixed income securities like government bonds, treasury bills, company debentures, which yield fixed income. However, do not get confused when we call them fixed yielding instruments. This does not mean a debt fund will offer fixed income.

Equity schemes on the other hand, predominantly invest in equity and equity related instruments. These schemes invest in stocks of companies having different market capitalization. These investments might be essential for those seeking long term capital appreciation.

Though both these schemes are different in nature, here are a few things to keep in mind when deciding whether you should invest in equity schemes or debt schemes:

Investment objective: An investment objective can be wealth creation. It can also be an income generation. If you are keen on focusing on income generation, then investing in debt schemes might seem like a much better idea. If you are investing for wealth creation or accumulation of corpus, then you may have to consider investing in equity schemes. Because equity funds are known for garnering capital appreciation over the long term. If you are expecting to accumulate wealth through your investments over a period of time, then equity schemes might help you out.

Investment horizon: Whether you should invest in an equity scheme or a debt scheme may also depend on the number of years you are willing to give yourself and your investments to grow. If you have an investment horizon of five years or less, then investing in a debt scheme makes much more sense. But if you do not have any urgency of money and do not mind staying committed to your investments for 10 years and above, then investments in equity schemes might seem like a sensible choice.

Expected capital appreciation: Investors are expected to be realistic when they think about capital appreciation from either of the schemes (equity and debt). Before concluding their expectations, they should first do some basic research about both equity and debt schemes to determine the average capital appreciation they have offered in the past. Although it is true that a fund’s past performance may or may not reflect on its future performance, it might give investors an estimate on how much they should be expecting from their investments.

Risk appetite: Every individual carries a different risk appetite and similarly, every mutual fund scheme carries a different risk profile. Depending on the nature of the scheme, a mutual fund will spread its assets across various instruments, thus diversifying risk. Although mutual funds carry a diversified portfolio and most of them offer active risk management, they are still volatile in nature. Equity investments are considered to be highly volatile as they invest in equity markets that rise and fall every now and then. Debt schemes on the other hand invest in fixed income securities. Even though on paper, equity schemes might seem riskier than debt schemes, that doesn’t make debt schemes any less volatile. Investors should remember that investments made in mutual funds, be it equity or debt schemes, are subject to market risks and hence returns from these investments are never guaranteed. A risk appetite is an individual’s ability to take a certain amount of risk with their money by investing in a scheme so that they are able to profit from it. Investors should determine their risk appetite before investing in mutual funds so that they invest within their boundaries.

Now you might be confused whether you should invest in equity or debt. Although several mutual fund advisors suggest that investors should keep their portfolio diversified with equity and debt depending on their risk appetite. The golden rule of mutual funds is not to keep all your eggs in one basket. Diversification also helps in balancing the portfolio’s overall risk. But if you feel that you can build your portfolio based on just one asset class, feel free to do so.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.