Liquid vs Debt vs Equity Mutual Funds. Best Mutual Funds for you.

                              Mutual Funds                            Equity MF V/S Debt MF V/S Liquide MF Hello my dear friends, I hope you...

 

                           Mutual Funds

                          Equity MF V/S Debt MF V/S Liquide MF

Hello my dear friends, I hope you all are doing well. Today I will discuss 3 categories of  Mutual funds, Liquid, Debt & Equity.

                          So let's start Investing With Ease.

Guys before getting into the content I want to tell you that, I don't recommend you any specific stocks, mutual funds, cryptocurrency, or any other asset classes. You must do your own research and then invest in any asset.

➤ If you are new then you must visit my Mutual Funds V/S Stocks because I have already discussed some of the things about Mutual funds. So here is the link below for you guys  🠊  Stocks V/S Mutual Funds

First of all, we will see the definitions of the Mutual Funds which we gonna talk about, then we will compare them point by point, and at last, we will see which one or maybe all of them fits with your financial situation.

⦿ Liquid Mutual Fund: Liquid Mutual Funds are a type of funds that are invested in securities with a residual maturity of up to 91days. 

Generally, these Mutual funds are better than our regular savings account, we will talk about this when we compare Mutual funds.

⦿ Debt Mutual Fund: Debt Mutual Funds are mainly investing in fixed income instruments, such as Corporate & Government Bonds, Corporate Debt securities, Money markets, etc. 

Generally, these Mutual funds are better than our regular fixed deposits, we will talk about this when we compare Mutual funds.

⦿ Equity Mutual Fund: Equity Mutual Funds are mainly investing in stocks, and some of these Mutual Funds also invest in foreign stocks and ETFs.

Generally, these Mutual funds come with higher returns and higher risks. We will talk about this later. There are many types of Equity Mutual Funds available in the market but here we only talk about generalized equity mutual funds.

➤ Now we know the basics, so comparing these Mutual Funds will be no problem at all.

⦿ Comparisons:

1) The Basic Difference:

We already know the basic difference from our definitions, still, we have some more differences there, like we compare Liquid Funds with our savings bank account because here we can withdraw our money anytime just like a savings bank account, but it gives us more returns from that.

The Debt Funds are better than fixed deposits and liquid funds only invest in short-term securities where Debt Funds invest in long-term securities and money market, corporate bonds for a long period.

The Equity Funds are completely focused on stocks and ETFs and it gives us the highest return from any of these funds. Equity funds can invest in one sector or diversify their investment to many sectors. Also, we can get exposure to foreign investment via Equity funds.

2) Risk and Reward:

We know that,

With Great Power Comes Great Responsibilities.

 Just like that with great returns comes bigger risks.

⦿ The Liquid funds come with the overall lowest returns, and it comes with the lowest risk. As Liquid Funds invests in short-term securities so there is very minimal risk to lose our capital. It gives 4 to 5% CAGR.

⦿ The Debt Funds come with moderate returns and are also better than a Fixed Deposit. As these funds are usually invested in Government regulated Bonds, Corporate Bonds, and other fixed-income assets it usually holds less risk than other investments. Still, if there is a downtime for Bonds its returns get lower. Its returns vary between 7% to 9% CAGR.

⦿ The Equity Funds are the most riskier funds ever in Mutual Funds because they directly invested in Stock & ETFs of companies stocks. So if a company gets bankrupt or if the overall market or a specific sector does not perform as expected then it can harm your investments and your capital also. But it can also give you huge returns like 50% to 70% returns in a year. It is one of the most preferred funds for long-term investments because in long term its CAGR is best 15% to 20%.

3) Expense Ratio:

Some people say it's not that much important, but believe me, it is also important for your investment if your investment horizon is for the long term, because the expense ratio is applied to the total capital you have.

Note: Here we only talking about Direct Mutual Funds, not Regular Mutual Funds.

➤ The Liquid Funds have an expense ratio of around 0.05% to 0.25%.

➤ The Debt Funds have an expense ratio of around 0.30% to 0.80% depends on what types of Bonds they are dealing with.

➤ The Equity Funds have various expense ratios, it depends on the funds' scheme.

The Index funds have the lowest expense ratios of 0.1% to 0.5%.

Now another Equity Mutual Funds like Sectorial Funds, ELSS schemes, ETFs  Funds, Foreign Investment Funds expense ratios varies between 0.4% to 1.5% or maybe higher.

So, we must take precautions while investing for long-term goals, if not then most of our returns will be reduced due to the expense ratio.

4) Tax on these Funds:  

⦾ For Liquid Funds: As we know Liquid Funds invest in Bonds, and short term debts so if we sell these funds before 3 years then the profit will be calculated as your income and you have to pay tax on this as your tax slab, whereas if you sell this after 3 years then you have to pay only 20% on capital gains with indexation benefit.

⦾  For Debt Funds: Debt Funds taxation is also the same as Liquid funds.

⦾  For Equity Funds: The Equity Funds taxation is quite different than Debt Funds. If you sell your Equity Funds before 1 year then you have to pay short term capital gain tax of 15% with an extra 4% of CESS on the taxed amount, the tax will become 15.46%. Now if you sell your equity after 1 year then you have to pay a tax of long-term gain, where on the first 1 lakh Rs you don't have to pay any tax. And you have to pay tax after the 1lakh Rs of your profit with 10% without indexation.

Now if do not come in a taxable slab then you don't have to pay this tax but you must file ITR for this.

➤ Now if you belong to a taxable slab then you must invest in ELSS equity funds and this comes under section 80C tax basket, so you can save more tax.

5) Lock-In Periods of Funds:

In Liquid Funds, there is no lock-in period, but if you withdraw money within 7 days of investing then there is a small withdrawal charge will be applicable.

Also in Debt Funds, there is no lock-in period if it's not an NPS(National Pension Scheme, we will write a separate blog on this). 

In Equity Funds, most of them have no lock-in period but most of them have withdrawal charges if you withdraw money before the funds' specified timeline.

And there is a lock-in period in ELSS schemes with 3 years of lock-in, in the meantime, you cannot withdraw any money from it by any means.

⦿ Conclusion: What is best for you?

➤ Here's comes the most important part of this blog is which one of them is best according to your needs.

➜ If you want to save some funds for emergencies and also want to get more returns than your regular saving account then choosing Liquid Funds will be your best option because you can withdraw anytime as per your needs and it has more liquidity than other funds.

➜ Now if you are investing for long period and get some handsome returns better than any FD with minimum risk then Debt Funds are best as per your risk profile.

➜ If you are young and also want to take some risk for great returns then Equity Funds are best for your portfolio.

➜ Now my recommendation is if you are investing for the long-term and want to build wealth then, you should try a mixed approach towards investing. If you are young then invest more in Equity Funds and some in Debt Funds & if you are quite old and have more responsibilities then go for 60-40 Equity -Debt ratio, vice versa.

With this, you can minimize your risk and this will also help you to grow your portfolio.

➤➤That is it for today guys. We will see you in the next blog, and I will try to post as fast as I can. Till then bye-bye & happy investing😃😃.

Editor:  Sk Elaf Ahmed.