Equity and debt funds are both common types of mutual funds, but they have some key features that set them apart.
Mutual funds bring together money from multiple investors and use it to buy a range of assets, with the aim of generating positive returns.
They're run by professional fund managers who make decisions on behalf of investors.
Exchange Traded Funds (EFTs)are a different type of fund that can also give you access to a collection of equities or bonds.
They tend to be passively managed - aiming to match, not beat, the performance of a stock market index.
Here, we explain the differences between equity and debt funds and what to consider when choosing investments.
Equity funds
Equity funds invest primarily in stocks, essentially taking stakes in lots of different companies.
They can potentially provide higher returns than other types of mutual funds, especially in times of economic growth. But the flip side is that they can also be more risky than funds that spread their risk across different asset classes.
If you want to invest in the stock market but don’t want to actively buy and sell individual shares yourself, equity funds can be a good option.
| Pros | Cons |
|---|---|
| Potential for higher returns | Higher risk due to stock market volatility |
| Can invest in a diverse portfolio of stocks | Little control over investment decisions |
| Run by professional fund managers | Higher management fees |
| Pros | Potential for higher returns | Potential for higher returns |
|---|---|---|
| Cons | Higher risk due to stock market volatility | Higher risk due to stock market volatility |
| Pros | Can invest in a diverse portfolio of stocks | Can invest in a diverse portfolio of stocks |
| Cons | Little control over investment decisions | Little control over investment decisions |
| Pros | Run by professional fund managers | Run by professional fund managers |
| Cons | Higher management fees | Higher management fees |
Find out more about investment options.
Bond funds
Bonds are issued by companies or governments when they need to raise capital, for instance if they’re embarking on an expansion or major infrastructure project.
Bonds are known as debt instruments because you lend money to the bond issuer, and they repay you with interest.
In the same way that equity funds invest in a variety of equities, bond funds invest in a wide range of bonds.This could include short or long term bonds, which tend to pay different rates of interest.
Bond funds typically provide lower returns than equity funds, but the risk of not getting your money back can be far lower.
| Pros | Cons |
|---|---|
| Low-risk investment option | Potentially lower returns |
| Diversify your portfolio and balance risk | Bond prices can fluctuate, interest rate risk |
| Fixed rate of return and income stream | Bond issuer could default |
| Pros | Low-risk investment option | Low-risk investment option |
|---|---|---|
| Cons | Potentially lower returns | Potentially lower returns |
| Pros | Diversify your portfolio and balance risk | Diversify your portfolio and balance risk |
| Cons | Bond prices can fluctuate, interest rate risk | Bond prices can fluctuate, interest rate risk |
| Pros | Fixed rate of return and income stream | Fixed rate of return and income stream |
| Cons | Bond issuer could default | Bond issuer could default |
Find out more aboutbond investmentoptions.
Investor takeaway
Choosing between equity and bond funds depends largely on your financial goals and risk appetite.
The potential for higher returns offered by equity funds comes with risk, while the relative security of bonds comes with lower potential for gains.
So there's often a place for both in a well-diversified investment portfolio.
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