Equity Fund or Debt Fund: Which is better while investing for financial freedom?

Are you saving your money to achieve financial freedom? But, mere saving won’t help you meet your financial needs. You need to invest your money in the right instruments. Your savings turn into investments when you assign them towards a specific goal(s) with an objective to achieve significant returns. Financial freedom is nothing but a stage in life when you regular inflow of cash or have accumulated sufficient assets or savings that can help you bear your living expenses and takes into consideration your future expenses as well without any hick. Of course, to achieve financial freedom, your basic financial goals such as buying a house, your child’ higher education, marriage, your retirement corpus needs to be met. To achieve financial freedom, two asset classes play a significant role – equity and debt. But which is the right asset class for your portfolio? This article aims to solve this quandary for you.

Both equity funds and debt funds have different roles to play. It is the combination of both these asset classes that helps investors achieve financial freedom. As a beginner, you must understand your objective behind investing. This will help you evaluate your financial goals, investment horizon, and risk profile. For instance, if you are looking to achieve high returns, you might have to have a high-risk appetite, as risk and returns tend to go hand-in-hand. In such a scenario, equity investments might be the ideal investment option for you. However, if you wish to protect your capital and are looking to invest in securities then debt fund might be more appropriate for you. Liquid funds are known to have a high liquidity factor.

Your risk appetite is also dependent on your age. If you are young, it is recommended to allocate a significant portion of your portfolio towards equities as this will give the equities the much-needed time to ride out the volatilities. Also, when you are young, you are not bombarded with too many financial responsibilities. This might make it easier to allocate a majority of your assets in equity and equity-related securities. Similarly, as you age, make sure to re-allocate your investment portfolio basis your financial goals, age, risk profile, and investment horizon. Investors nearing retirement are suggested to hold a higher allocation of debt securities.

Mutual funds that invest a minimum of 65% of their assets in equity shares of companies are known as equity mutual funds. These funds are known to be highly volatile in nature. These funds are known to offer significant returns over a prolonged period. Thus, equity funds are ideal for long-term investing. Similarly, mutual funds that invest at least 65% of their assets in debt securities of companies are known as debt mutual funds. These funds usually invest in fixed-income securities. They are usually more liquid that equity funds.

Irrespective of the type of mutual fund you choose for your portfolio, make sure that it aligns with your investment portfolio. Also note that, mutual fund investments are subject to market risks. So read all the scheme documents carefully before investing in mutual funds. Happy investing!