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Mutual funds’ assets under management (AUM) in India were valued at approximately ₹752 billion as on August 31, 2025, according to the Association of Mutual Funds in India. Equity and debt mutual funds constituted about 44% and 25% of this, respectively. While preferences may seem skewed towards the former, in markets characterised by volatility and opportunity in equal measure, these funds play complementary roles in an investor’s portfolio. Read on to understand how each of them works, what they bring to the table, and how they differ.
Equity mutual funds invest a minimum of 65% of their assets into equity-linked instruments, per SEBI (Securities Exchange Board of India) rules. Investments in shares of companies across sectors, geographies, and market capitalisations help mitigate concentrated risks on one hand and offset them by providing exposure to emerging opportunities on the other.
While expense ratios are higher with these funds owing to a need for active management, they are still a popular instrument for long-term wealth creation. Bear in mind however, their performance is entirely market-linked which may impact risk levels.
Debt mutual funds invest capital in baskets of fixed-income securities such as government and corporate bonds, treasury bills, commercial papers, and certificates of deposit. Fixed interest payments on these underlying instruments at regular intervals are the primary source of returns for investors.
These funds may appeal to investors with lower risk appetites and those who prefer predictable income streams and capital preservation over capital appreciation. Diversification within the funds, moreover, helps mitigate concentrated risks in a manner similar to equity funds.
Debt funds vs Fixed Deposits: Which one should you pick?
Debt mutual funds are not the only preferred instrument for capital preservation in India. Fixed deposits have long been popular with investors seeking low risk levels and assured returns. While their USPs overlap, it is also essential to distinguish between the two, given they react differently to market dynamics and their returns and liquidity levels vary.
While both equity and debt mutual funds have their own USPs, there are a few important distinctions between the two.
Risk and volatility
Equity mutual funds experience higher levels of volatility as their returns are dependent on the broader market, as well as the performance of the underlying companies of which the fund has invested in. Debt funds are comparatively more stable, but not entirely risk-free either. Interest rate fluctuations and credit rating changes on underlying securities may impact these funds’ NAV (net asset value) and subsequent returns.
Liquidity
Equity funds offer easy redemptions. However, redemptions are almost always influenced by prevailing market conditions, which can affect the value of the proceeds received by investors, as well as timelines for the same. Debt mutual funds on the other hand invest in fixed-income instruments with relatively predictable price trends. Moreover, sub-categories such as liquid funds invest in securities with maturity timelines of no longer than one day, with no lock-in periods. This makes them highly liquid investment instruments.
For investors confused between equity and debt funds, hybrid mutual funds may be a suitable middle ground. They are designed to give an investor the best of both worlds by investing in a mix of equity and debt instruments. Depending on the nature of the investments (equity or debt-oriented), or if these funds actively adjust asset allocation with evolving market cycles, they may be classified as aggressive, conservative, or balanced hybrid funds.
Hybrid funds may appeal to first-time investors looking to simplify and streamline their portfolios as well as seasoned investors looking for instruments that can adapt and evolve with changing market conditions.
The choice between these three categories of mutual funds boils down to one’s financial goals, investment horizon, and risk appetite. This is where SC Invest steps in as a trusted ally, with a list of mutual fund selections via Fund Select, expert and actionable insights via Market Views on-the-go, and more.
Debt Mutual Funds: The What, How, and Why
What are Equity Mutual Funds and Why Should You Invest?
Choosing Mutual Funds for Beginners: A Guide to Smarter Investments
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