Equity Funds vs. Income Funds: Which Is Better?

Choosing wisely where to invest your hard-own money is a major responsibility in recent days. In the ocean of endless investment opportunities how will you know which will be ideal for you? There are 2 basic types of investment opportunities you will get to know about, one is equity fund and the other one is income fund. But before you start investing in these funds you must get aware of a few things. For example, what they are?, about their characteristics and also is that correct for you? Let’s find them out together through a brief discussion.

Definition Of Equity Fund 

If we explain in the easiest words then we must say, an equity fund is a kind of fund that invests most of your money in stocks.This fund can be active or passive. If you go for the active equity fund then the managers will conduct a deep research about the companies, watch their performance and have a detailed eye on the market to invest your money in the top quality stocks. Apart from this if you go for the passive equity fund then managers will make a portfolio for you in the popular market index.

Characteristics Of Equity Fund

• As you can guess depending on the name of the equity fund, a major portion of this fund corpus is invested in equities of different companies. Keeping the objective, capital appreciation in mind fund managers invest in all sizes of company’s stocks. 
• If you have the ability to wait just to achieve a high rate of return on investment then investing in an equity fund can be a very good option for you. But  if you want a safer experience even with a less risks and stable returns on investment then avoiding equity funds will always be a better option. 
• In most of the cases equity funds need at least a few years to give high returns. As equities are subject to market risk so that the prices go down then it will also grow gradually with time. This is why if you are investing in an equity fund you should consider it as a long term investment plan and give it at least 8 years or more to grow.  
• With this equity fund you can exclusively get a diversifying portfolio of stock investment because they mostly invest in 40-50 stocks of different companies. 
• If you are aiming for wealth generation then investing in an equity fund can be a very good option for you as it gives better returns compared to debt funds, bank deposits and many others. 
• Just like other common mutual funds here in equity funds you can invest a lump sum amount at a time or you can also do SIPs (Systematic Investment Plans).

Categories Of Equity Fund

The categories of equity funds are, small cap fund like mid-cap fund, large-cap funds, global funds, sector oriented funds like healthcare, technology and lastly thematic funds like AI, green energy 

and many others. 

Definition Of Income Fund 

Income funds are a special category of fund within a broader spectrum of debt funds. People who invest in such funds are expected to get a consistent regular income through their investments. The income is mostly generated by dividends, interest payments and others. Typically these funds invest in debt instruments, i.e. government securities, corporate bonds, certificates of deposit and many others. 

Features Of Income Funds

• More than aiming for a high return on investment at a time, if you are planning to generate a regular income using your investment then an income fund will be the most ideal investment option for you. 
• For retired persons income fund is a great option as they can get it just like their pension
• These funds are considered to be a safe investment plan due to lower risk. However, income funds are not risk-free.
• You can anytime buy these funds and also you can sell them whenever you want this is why income funds provide high liquidity to investors. 
•  These funds are mainly managed by fund managers. They keep tracking the portfolio regularly to get a better response to economic changes. 

Types of Income Funds 

If you have decided to invest in mutual funds then do deep research about each type., such as high-yield bond funds, dividend income funds, government bond funds, municipal bond funds and so on. 

Difference Between Equity Fund & Income Fund

Understand the basic difference between equity funds and income funds right below, and make your decision accordingly.

• The ultimate objective of an equity fund is to get capital appreciation but the main objective of an income fund is always generating a regular income by balancing the portfolio risk. 
• Equity fund does not give protection for the capital due to market risk but an income fund aims to protect your capital through principal return at the time of maturity. 
• Equity funds have a high diversification rate but income funds have a limited diversification rate. 
• The taxation rules of equity funds depend on the holding period. To be more prominent the capital gains tax on profits and dividend tax on distributions. On the other hand, the income funds are taxed as ordinary income. 

To Sum Up

The ultimate goal of both the investment plans are completely different to each other. More than getting confused between equity and income funds you need to set your aim first. However, before you make any major decision consult with your financial advisor first and listen to their suggestions accordingly. Last but not the least understand your risk tolerance level first and then investing in the funds. 

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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.