A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What is the difference between equity fund and debt fund?
“Aren’t all mutual funds the same? After all, it’s a common fund, isn’t it?” He asked Gokul. His friend Harish, a mutual fund distributor, smiled. He was all too familiar with such an observation coming from many.
A large number of people carry the misconception that all mutual funds are equal. There are various types of funds, the main among them are equity funds and debt funds. The difference between the two comes from where the money is invested. While debt funds invest in fixed income securities, equity funds invest predominantly in equities and related securities. Both equities and fixed income stocks have different characteristics that determine how their respective patterns would behave.
Different investors have different requirements. Some need high returns to achieve their goals, while some cannot afford to take high risks. Some investors may have long-term goals, while some may have short- and medium-term goals. An investor must choose an equity fund for long-term goals and debt funds for short- and medium-term goals. Equity funds have the potential to offer higher returns, but with risk, while debt funds offer relatively stable but moderate to low returns.
