How investing in equity differs from investing in debt instruments

Sivaram is a conservative investor. He thinks equity mutual funds are very risky. However, he is keen to know how they differ from traditional investments.

Sivaram’s comfort with saving schemes lies in the pre-specified return and safety of principal they offer, as well as the fixed/pre-determined rate of returns. Incidentally, the government has now aligned the rates of all saving schemes with the market. This has altered the return features of these instruments, though the risk still remains low.

By choosing market-linked instruments such as equity mutual funds, Sivaram would move into a new growth asset class called equity, rather than confining himself to fixed income investments. The returns would align with the market rates on an everyday basis. This means three things for Sivaram. First, he can look forward to a fair return as available in the market without settling for a lower return.

Secondly, he can hold the investments for as long as he needs to. Open-ended mutual funds would not have a fixed maturity period, enabling him to save and redeem his money as he wishes. Third, the risk in his investments alters. While the investment in a mutual fund would be diversified well across various securities, it would be subject to the ups and downs of the market. If Sivaram makes the transition, he will face the risk-return trade-off of a possible better return, coming with a higher risk.


Sivaram can instead choose to allocate his money between both choices, so he manages his risk even better. He can begin with a small amount in a mutual fund along with his traditional investments and build it up as per his comfort, over time. He will find that the volatility in his market-linked investments is well countered by the stability of his investments in saving schemes. In the long term, he may find this strategy quite rewarding in terms of return.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)