A Mutual Fund is a professionally organised fund which collects money from the public and then invests this money in those instruments for which it has raised funds.  There are many types of Mutual Funds, but the 2 most popular funds are Debt Mutual Funds and Equity Mutual Funds. Debt Mutual Funds are also known as Debt Funds

Difference between Debt & Equity Mutual Funds

1. Nature of Investments

Debt Mutual funds are funds which raise money from the public and then invest a major portion of this amount in various fixed income earning investments like Govt Bonds, RBI Bonds and other highly rated securities.

Equity Mutual Funds are funds which raise money from the public and then invest a major portion of this amount in stock markets.

2. Taxability

      Type of Fund                   Period of Holding            Tax Rate
   Equity Mutual Fund         Less than 1 year i.e. Short Term               15%
         More than 1 year i.e. Long Term               Tax Free
 Debt Mutual fund        Less than 3 years i.e. Short Term           As per Slab Rates
        More than 3 years i.e. Long Term               20%

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 3. Risk

Equity Mutual Funds usually invest in Stocks and Shares and therefore they have an inherent risk attribute which is much higher than the Risk attribute of Debt Funds which usually invest in Fixed Income earning Investments.

4. Returns

As Equity Mutual Funds invest in stocks and shares, there is a good probability of higher returns being generated as compared to Debt Funds. But as discussed above, there is also a risk involved in Equity Mutual Funds as a result of which there may be negative returns as well.

The above mentioned differences between Debt Funds and Equity Mutual Funds have been summarised below:-

ParticularsDebt Mutual FundEquity Mutual Fund
NatureInvest in Bonds, Corporate Deposits etcInvest in Stocks and Shares
TaxabilitySTCG ie less than 3 years: Slab Rates LTCG ie more than 3 years: 20%STCG ie less than 3 years: 15% LTCG ie more than 3 years: Exempt
RiskLow RiskHigh Risk
ReturnLow ReturnsHigh Returns