What are the Drawbacks of Equity; Debt Mutual Funds?

What are the Drawbacks of Equity & Debt Mutual Funds? Mutual funds are a popular investment option for retail investors. While advantages of mutual funds include diversification, professional management, high returns, etc. investors should also know about the most important drawbacks of equity and debt mutual funds.  Today will discuss the drawbacks of equity and debt mutual funds and also understand which mutual fund will be suitable for your needs. 

Equity Mutual Fund

Equity Mutual funds invest in stocks of companies. Equity mutual funds carry high risk but also provide higher returns than debt mutual funds. Equity mutual funds are the best long-term investment option for beginners. 

Drawbacks of Equity Mutual Funds

The disadvantages of equity mutual funds are:  1. Not for the short-term: Equity mutual funds are too volatile in the short-term. Therefore you should invest in equity mutual funds only for long term goals.   2. Not for conservative investors: Equity mutual funds are subject to market risk. So, if you have a low risk appetite, then you should invest in debt mutual funds instead.  3. If you expect guaranteed returns: Since equity mutual funds invest in the stock market, the returns are not guaranteed. If you want guaranteed returns then you should invest in bank FDs.  Key takeaways:
  • Not suitable for short term investors
  • Not suitable for conservative investors
  • Not suitable for investors who want guaranteed returns. 
  • Not suitable for investors who are scared of market volatility
[Recommended reading: Best Equity Mutual Fund in India 2021]

Debt Mutual Fund 

Debt mutual funds invest in debt instruments like company debentures, government bonds, and other fixed income assets.  Debt mutual funds are much safer than equity mutual funds. 

Drawbacks of Debt Mutual Funds

The disadvantages of debt mutual funds are:  1. Low returns: While debt mutual funds provide higher returns than Bank FDs, their returns are much lower than equity mutual funds. 2. Not 100% safe: Debt mutual funds also face credit risk, reinvestment risk etc. So, your investment is not safe and the returns are also not guaranteed.  3. Not for long term: Debt mutual funds are suitable for short term goals. But if your goal is 10 years down the line, then you should invest in equity mutual funds instead.  4. Not for Aggressive investors: Debt mutual funds have low risk but also provide low returns. If you are an aggressive investor, then debt mutual funds are not suitable for you.  Key takeaways: 
  • Low returns.
  • Not 100% safe
  • Not suitable for aggressive long-term investors. 
[Recommended reading: Best Hybrid Mutual Fund in India 2021]

Conclusion:

Both equity and debt mutual funds are created for different risk profiles and investment objectives. While equity mutual funds are risky in the short term, they provide higher returns in the long-term. Similarly, debt mutual funds can be your best friend if you are a low-risk investor and want to save your principal while earning moderate returns.  Once you select between equity and debt mutual funds, the next step is to select the best equity and debt mutual fund from more than 2500+ schemes! But this can be a difficult task. Luckily, Samco’s mutual fund investing platform, RankMF analyses and ranks all the mutual funds in India.  To find out and invest in the best equity and debt mutual funds in India for 2021, open a Samco Demat and trading account and get FREE access to RankMF - India’s best mutual fund research platform. 
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About The Author

The author is a Certified Financial Planner (CFP) with 5 years experience in Investment Advisory and Financial Planning. Her strength lies in simplifying complex financial concepts with real life stories and analogies. Her goal is to make common retail investors financially smart and independent.

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