It’s a common scene when most of the people look perplexed on the mention of investing in mutual funds. There is a plethora of mutual funds, all of which demand your attention wherever you look

But even if you already are invested in mutual funds, choosing the right securities to invest your money demands time and knowledge. To pick the right scheme for investment in mutual funds, the first step is to underline the principal differences between debt and equity mutual funds. 

What is the nature of investment?

Understanding the primary difference between these two isn’t as hard as you think. Funds to be invested in both debt and equity mutual funds are raised from investors such as you and me, but the major portion of debt funds are invested in high-yield bonds such as governmental bonds and RBI bonds. The maximum part of equity mutual funds goes into the stock market.

What is the risk factor?

On the riskometer, you will find equity mutual funds way above the debt equity funds because the stock market can be highly volatile. On a regular basis, you have to witness highs and lows. But if you are all for taking the risks, no one can stop you from making big bucks in shares, especially in the long run.

The excitement of equity funds isn’t there in the debt mutual funds because your financial wealth is taken care of with fixed-income earnings investments. For those who don’t have the heart to experience the rush of stock market, it is advisable to go with the former.

Which yields better returns?

The ground rule of making big money is to invest more and more and stay invested for the long term, with the general consensus being that higher risk leads to higher returns. On the other hand, equity mutual funds can leave you financially strained in case a storm hits the market but if you manage to weather the storm, you will definitely profit. If you are more comfortable with taking minimal risks because people are depending on your income, go for debt mutual funds because they are much safer and though they won’t grow your wealth, there’s a much lesser chance of losing it all.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.