The last one year has been tough for Indian equities, with benchmark indices Sensex and Nifty fighting multiple bouts of volatility amid global tariff wars, geopolitical tensions and other headwinds. This posed a challenge for equity mutual funds to limit their losses. Only a handful of equity mutual fund schemes managed to give positive returns during this period. All key categories in the equity space saw negative average returns. This allowed debt funds to completely outperform equity funds.
Equity mutual funds: How has the past year been?
Reviewing the performance of equity funds, only the International and Sectoral – Banking as sub-categories delivered positive returns. All other sub-categories in the equity category declined, with Sectoral – Technology reaching as low as (-)13%.
The average returns (1 year) for the main subcategories have been as follows:
Multicap Funds: (-)0.92%
Largecap Funds: (-)1.31%
ELSS Funds: (-)1.70%
Flexicap Funds: (-)2.06%
Midcap Funds: (-)1.66%
Smallcap Funds: (-)5.33%
Large & Midcap Funds: (-)5.68%
This data clearly shows that equity mutual funds have been under pressure due to volatility in the equity market. However, it’s important to note that these are returns from just the last one year. If we consider the long-term, such as 3 years or more, equity funds have delivered impressive returns to investors. The 3-year CAGR for many categories exceeded 20%.
Debt funds: A safe and stable option
Stable returns with low risk characterise debt funds. They primarily invest in bonds, government securities, and corporate debt instruments. Debt funds have performed better. Average returns across these subcategories ranged from 3.87% to 10.68%. The major subcategories and their performance are as follows:
Credit Risk Fund: 10.68%
Medium Duration Fund: Around 9%
Corporate Bond Fund: Around 8.5%
Floater Fund, Short Duration Fund, Target Maturity Fund: 3.87% to 7.5%
Who should invest in debt funds over equity funds in 2025?
Debt funds can suit those who don’t want to take much risk and prefer safety over high returns. Debt funds can be a good choice for investors looking to park their money safely for the short or medium term. People who want stable, tax-free, or low-risk returns will also find it suitable.
Equity funds vs debt funds: Key differences and benefits
| Aspects | Equity Funds | Debt Funds |
| Risk level | High; returns depend on market performance and volatility | Low; returns are more stable and predictable |
| Returns | High in the long term (3+ years, often 12–20% CAGR) | Moderate, steady returns (typically 4–10% annually) |
| Investment period | Suitable for medium to long term (3–5 years or more) | Ideal for short to medium term (1–3 years) |
| Taxation | 12.5% tax on long-term capital gains (LTCG) above ₹1.25 lakh after 1 year | 12.5% tax on LTCG if held for 2 years and above without indexation |
| Best for | Investors seeking high growth and willing to take risk | Investors prioritising capital safety and steady income |
This means that if you look only at last year’s returns, debt funds performed better. But over the long term (3 years and above), equity funds offered investors higher returns and better wealth creation.
Conclusion: Which fund is better?
Short-term investment or safe option: Debt funds are better.
Long-term: Equity funds are more profitable for those seeking higher returns.
Considering market volatility and global headwinds, investors should choose funds based on their risk profile and investment horizon.
Summing up…
Remember, debt funds have outperformed market uncertainty over the past year, but equity funds have delivered higher returns over the long term. Setting an investment goal and selecting funds accordingly is the key to smart investing.