After entering the job market, one of the most common goals most freshers have is to accumulate enough wealth in the future. One of the ways one can amass enough money is by investing a part of their earnings in the market. Investing in the market can be done with the help of investment plans or tools that are available. One of the prominent examples of an investment tool that a lot of people invest in is mutual funds and their various subcategories. Some of the well-known variants of mutual funds are debt mutual funds, equity mutual funds and hybrid funds. Let’s look at each of these variants with their numerous benefits, shall we?
Equity funds are a type of mutual funds that are known for primarily investing in stocks. Your money is pooled into the fund with the help of either SIP or lumpsum, which then is invested into various equity stocks on your behalf. The gains or losses accrued in the portfolio affect your fund’s Net Asset Value (NAV). While there are technicalities involved, this is the crux of investing in equity mutual fund schemes. However, it is important to note that being a prudent long-term investor helps to understand the functioning of an equity mutual fund.
How do they work?
These funds are known for investing a major corpus in equity shares of various companies in specified proportions. Asset allocation in these funds is based on the type of equity fund and its alignment with the investment objective. After studying the market conditions, assets can be allocated to stocks of small-cap, mid-cap, or large-cap companies. After allocating funds to the equity segment, the remaining amount is invested in debt and other money market instruments. Doing so helps in bringing down the element of risk and takes care of sudden redemption requests.
What are their benefits?
Listed below are some of the benefits of equity mutual funds:
- Equity funds have tax benefits:
By investing in an equity-Linked savings scheme or ELSS, one can enjoy tax benefits. For example, you opt to invest ₹1.5 lakh in an ELSS scheme. As per the scheme’s provisions, under Section 80C of the Income Tax Act, 1961, you can save up to ₹46,800 each year. This ensures that the tax liabilities are low.
- They are known for offering capital growth:
These funds are known for coming with the potential to offer considerable income over time. The probable income earned may help you live your life in the future, especially after retirement. With the help of these funds, you can accrue a substantial amount of wealth over the long term. For example, you aim to save ₹50 lakhs when you retire. If you are looking for investment options, you will be informed that opting for an equity fund may help you reach your goal.
- These funds are liquid too:
Generally, equity funds don’t come with a lock-in period. This means that the units of an equity fund can be redeemed anytime and that too on any business day at the applicable net asset value (NAV). However, it is important to note that before opting for equity funds, please check what kind of equity fund you are selecting. If you have opted for an equity-linked saving scheme, then you need to remember that ELSS comes with a lock-in period. If you have opted for an ELSS fund, you cannot liquidate it till the lock-in period is over, which in this case is 3 years.
- They are managed by professional fund managers:
Fund managers are market experts who study the market, analyse the performance of various companies and then invest in the performing stocks that could deliver optimal returns to the investors. Fund managers typically have experience and expertise in investing in the market. They are the people who are tasked with studying the performing stocks of the market and investing in them.
Debt funds or fixed-income funds generally invest in assets like government securities and corporate bonds. Their main objective is to offer reasonable revenue to the investors. These funds are an ideal investment option if your financial goal is to acquire a steady income over time.
How do they work?
Debt funds come with the objective of generating returns for investors by investing their money in avenues like bonds and other fixed-income securities. This means that these funds buy the bonds and later earn interest income on the money. The yields that mutual fund investors receive are based on this.
One may think that this resembles how a Fixed Deposit (FD) works. But there are many more nuances to debt fund investments. A particular debt fund can buy only specific securities of specific maturity ranges. For instance, a gilt fund can buy only government bonds while a liquid fund can buy securities that come with a maturity of up to 91 days. Also, debt funds do not offer assured returns but have market-linked returns, which can fluctuate. A rise in interest rates can have a positive impact on yields/interest income. But that can also negatively impact bond prices. The reverse is true when interest rates fall.
What are their benefits?
Here are a few of the advantages of debt funds:
- They are known for providing stable yields:
Consider this scenario. After entering the job market, you decide to invest. If you are looking for an investment tool that may provide you with income at regular intervals, debt funds might just be helpful. In this type of fund, investments are made on securities like corporate bonds, government securities, treasury bills, commercial papers, and several other types of money market instruments. Investing in these securities ensures that you can enjoy income at regular intervals. Most of the time, the oscillations in the market don’t have an impact on the income of debt funds. Therefore, they are considered a wise choice.
- Market fluctuations don’t have an impact on their performance:
In debt funds, the portfolio manager allocates funds into fixed-income securities such as commercial papers, corporate bonds, treasury bills and government bonds. These securities are known for being the ones that yield money to investors regularly. Regardless of the market condition, it will not impact the income made. In case you opt for a debt mutual fund and the market is not performing very well, don’t worry, the market’s low performance will not have an impact on your revenue.
- Thanks to diversification, the portfolio remains stable:
You have hired a fund manager to help you with your investments in the market. When you ask for the best option for making income in the long term, you will be told that the best option, in that case, will be investing in debt funds. After opting for it, you will learn that the best way the manager will help you reach the goal is by diversifying your money. Diversifying in the world of investment means that your funds are invested in a wide range of sectors instead of putting them in one place. Doing so helps you to cushion the loss incurred from a low-performing asset.
- These funds are very flexible:
Debt funds offer you the option to move your money to different funds, making them a flexible option. Moving funds to different sectors in debt funds is possible with the help of the systematic transfer plan i.e., STP. With its help, the investor under this plan will have the option to invest their funds either in a lump sum or systematically transfer a small portion of their money into equity at regular intervals. Doing this helps the investors to spread out the risk of equities instead of putting all the money into one place. This is one of the reasons why seasoned investors and a knowledgeable fund manager will advise you to opt for a debt fund.
After going through equity and debt funds it is befitting that we look at the investment option which is a blend of both. These funds invest in both debt and equity instruments, thereby achieving diversification and avoiding the concentration risk. Hybrid funds are known for offering higher returns than a regular debt fund while not being as risky as equity funds. The choice of a hybrid fund depends on your risk preferences and investment objective.
How does a hybrid fund work?
Hybrid funds are generally considered more stable than equity funds and are known for providing higher revenue than debt funds. Thanks to this aspect, they are popular among conservative investors. Up-and-coming investors who are willing to get exposure to equity markets may invest in hybrid funds. The presence of equity components in the portfolio offers the potential to earn higher returns. Simultaneously, the debt component of the fund provides a cushion against extreme market fluctuations.
What are their benefits?
Listed below are some of the advantages of investing in hybrid funds:
- They provide access to multiple asset classes:
One of the prominent features of hybrid mutual funds is that instead of investing in different funds with an aim to meet the need for different asset classes, you can access multiple asset classes in a single investment tool.
- These funds are not that volatile:
In stark contrast to equity funds that are subject to market volatility, hybrid funds can help you manage your portfolio in a flexible manner in a volatile market. For instance, the quick sale through an arbitrage hybrid fund ensures that volatility has no impact on your returns.
- They are known for balancing risks with returns:
Another major advantage of hybrid mutual funds is that they allow investors to strike the right balance between the risk and return. When compared to pure equity funds, hybrid funds are known for offering the stability of stable assets like debts. This allows investors to experiment with high-return equity investments by cushioning them with more predictable returns on their debts. These funds can further lower the risks of the equity component.
- Funds here can be diversified easily:
Hybrid funds are also known for offering investors an option to diversify their investments as they allow them to allocate funds to both equity and debt. As the share prices fall, the debt part of these investment plans ensures stability. Imagine that you have chosen to invest in a hybrid mutual fund when a market is going through a bear phase. However, you don’t need to worry about returns, the debt component of the plan may ensure that these funds might be able to withstand the low-performing shocks of a stock market that is going through a rough phase.
While each of these plans comes with its own set of benefits, your decision should not be swayed by that. Instead, please analyse things like your risk profile, income and financial goals and after doing that, make the decision whether you want to invest in debt funds, equity funds or hybrid funds.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.