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Equity or Debt? Where Should You Allocate Your Assets?

Mutual Funds61 views

Highlights

  • Wondering which to choose - equity or debt - for asset allocation? Equity allocations make sense for someone with a long-term goal and high-risk appetite
  • Debt allocations would mean more significant for conservative investors having a low-risk taking capacity

Earning money on a regular basis eases the day-to-day life significantly. However, if you don’t manage your earnings well, you could possibly be in a spot of bother in case you stay jobless for an extended period. Also, when you retire with no income to feed on, the tactful money management that you must have done before will hold you in good stead during retirement days. So, you must invest the money in sound financial instruments to fetch good results over time. These instruments would generally be equity or debt.

Investing directly in these instruments won’t give you the benefit of diversification that is all but abundance in mutual funds, a pool of money collected from different investors to fulfill the common objective. The diversification ensures the investment makes the most of different financial instruments.

As every individual has different thought process with regards to money, equity and debt can suit some but not all. To know who should choose what – read the post further.

Factors Based on Which You Need to Decide Your Asset Allocation

The selection of equity or debt for asset allocation would depend upon the following factors.

Financial Goals

The financial goal you set will greatly dictate the asset allocation you should make. If you have set ambitious goals of wedding and children education corpus, you should allocate assets more towards equity through mutual funds. Equity funds tend to appreciate the growth of capital by investing predominantly in the high-return proposition of equities. The returns generated from these funds can help you achieve ambitious goals with ease. In case you seek regular income generation, you better divert your assets more in debt mutual funds that are known to provide a stable flow of income to the investors. These funds invest mainly in fixed income instruments to serve the said purpose.

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Risk-appetite

Different individuals react to investment risks differently. Yes, mutual funds diversify risks by dispersing the investments in different financial instruments. But there’s no denying that there are varied levels of risk depending on the type of mutual fund product you choose. While equity fund investments would need your risk-appetite to be high, debt investments can be preferred for someone with a low-risk appetite.

What’s also significant is that the risk-appetite may not remain the same in the entire lifespan. It can change as you move from one life cycle stage to another. When one is young say 25-30 years old, he/she is expected to take big risks and so equity funds can be in sync his/her investment attribute. As you get to 45-50, the risk-taking capacity can wane to a degree. But you can still invest in equity instruments through a hybrid fund (equity-oriented) that offers both capital appreciation and income generation benefits to the investors. As you go past 60, the risk-appetite is expected to be on the lower side. In such a case, debt fund investments would sound more viable.

All said, the likely risk-appetite at different life stages mentioned above is a general perception concerning investments. In reality, things may pan out differently to the way described above. Based on how your risk-appetite would be at a given stage of your life, you need to make the choice accordingly from equity and debt funds.

Investment Horizon

The time for which you wish to stay invested will also be a vital factor to consider before choosing between equity and debt funds. If one can invest for long, say 5-10 years or above, the concerned individual must choose equity funds to dictate his/her financial course of life. In case you want to invest for a short period of 1-3 years, debt funds would be the option you can avail.

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Disclaimer – “Mutual fund investments are subject to market risks. Please read the offer document carefully before investing”.