Equity Vs Debt Mutual Funds: Where Should SIP Investors Put Their Money Amid Market Volatility

The domestic equity markets have been under turbulence for the past few months. Both the benchmark indices, the BSE Sensex and the NSE Nifty have corrected 10.3 per cent and 9.44 per cent, respectively, from their all-time highs in September 2024. 

Rising bond yields, absence of anticipated liquidity measures in the recent Reserve Bank of India (RBI) monetary policy committee (MPC) meeting, concerns over inflation and global trade policies are weighing on investor sentiments. 

“US bond yields have risen above 4.5 per cent, leading to a stronger dollar and capital outflows from emerging markets, including India. Additionally, global uncertainties, such as potential tariffs and policy shifts under the Trump 2.0 administration, have increased currency volatility,” says Amit Suri, founder, AUM Wealth. 

So, amid the ongoing volatility in market, where should investors park their money? In equity-based funds or debt-based funds?  

Further, the RBI, in its last monetary policy of this fiscal year, slashed the repo rate by 25 basis points (bps) to 6.25 per cent. Amid this decision, do debt mutual funds look more attractive now? Here’s what experts say. 

Equity Vs Debt Mutual Funds 

Equity mutual funds provide diversification by holding a portfolio of shares across various sectors, aiming to deliver capital appreciation over the long term. These funds are ideal for investors with a higher risk appetite, looking for growth potential and willing to tolerate short-term market volatility with expectations of long-term gains. 

Debt mutual funds, on the other hand, invest in fixed-income securities, such as bonds, government securities, and money market instruments. These funds primarily aim to generate regular income with lower risk compared to equities and are suitable for conservative investors seeking stable returns. 

Volatility in equity market also present opportunities to invest at lower net asset values (NAVs). As a result, equity mutual funds recorded a 15 per cent month-on-month (MoM) increase in inflows at Rs 41,155 crore in December 2024, while debt funds saw an outflow of Rs 1.27 lakh crore in the same period. Overall, the mutual fund industry witnessed a net outflow of Rs 80,509 crore in December. 

In calendar year 2024, equity funds recorded total inflows of Rs 3.94 lakh crore, and debt funds saw an inflow of Rs 1.6 lakh crore. 

Where Should You Put Your Money? 

Conservative Investors 

Deepak Ramaraju, senior fund manager, Shriram AMC, says, “Conservative investors may focus on low-risk options, such as debt funds, liquid funds, and balanced or hybrid funds. These funds aim to offer stability with minimal exposure to market volatility, while short-term and ultra-short-term funds targets for additional safety. We believe that diversifying across asset classes such as equity, debt, and gold could further reduce risk.” 

For conservative investors, Yogita Dand, certified financial planner, says that keeping a minimal equity allocation makes sense. “The focus should be on Balanced Advantage Funds or Multi-Asset Allocation Funds, which provide equity-like returns but with lower risk," she adds. 

Moderate Investors 

According to Ramaraju, moderate investors may benefit from large-cap equity funds, which provide steady growth with lower volatility.  

“Dynamic asset allocation funds, adjusting between equity and debt based on market conditions, offer flexibility,” says Ramaraju. 

Adds Dand: “Moderate investors can maintain a balanced mix of equity and debt, ensuring diversification while taking advantage of market opportunities.” 

Aggressive Investors 

Ramaraju says aggressive investors may consider mid-cap and small-cap funds, which carry higher volatility but offer greater growth potential.  

“Exposure to sectoral or thematic funds, as well as international or emerging market funds, may enhance growth opportunities. Systematic investment plans (SIPs) in these funds might help manage volatility through dollar-cost averaging,” says Ramaraju. 

Dand adds: “Aggressive investors should continue investing through volatility, as market corrections provide a great opportunity to accumulate units at lower valuations. In fact, increasing investments during dips can enhance long-term returns. Overall, staying invested with a disciplined approach is the key.” 

Amit Suri of AUM Wealth recommends investors of all types of risk appetite to consider increasing their SIP contributions during this period of market volatility.  

“If increasing SIPs is not feasible, investors should at least invest lump sum in their existing funds. Historically, investing consistently during market downturns has yielded above-average long-term returns, making this an opportune time to maximise the benefits of rupee cost averaging,” he says. 

RBI MPC Repo Rate Cut: Should You Realign Your Investment Strategy? 

Dand expects locking in higher interest rates through fixed-income investments after the RBI’s rate cut move. 

For debt mutual funds, she says a strategy shift might be needed. “Long-duration funds could become more attractive in a falling rate environment. However, investment decisions should align with their goals rather than short-term policy moves,” Dand says. 

On the equity side, she adds: “SIPs should continue, and there is no reason to make drastic changes. Staying diversified and invested through market cycles remains the best approach.” 

After a 25 bps rate cut, Suri says, “Investors should position their debt allocations accordingly. Low-duration funds are preferable for conservative investors, while corporate bond, dynamic bond and long-duration funds can benefit those with a higher risk appetite. A diversified approach across asset classes should be the priority and investors continue to focus on their goals.” 

Outlook For Equity Market This Calendar Year 

According to Ramaraju of Sriram AMC, though the Union Budget 2025 did not add any negativity to the capital gains, the markets might remain buoyant for the medium term. Cutting personal taxes can translate into higher savings and this can translate into higher SIP flows which may support the markets further,” he says. 

“While the equity market in 2025 is expected to experience moderate growth, investors should remain vigilant, considering diversification and staying informed about economic and policy developments,” he adds. 

Dand says: “The past few months have seen market corrections, and there could be more ahead. However, the broader outlook remains positive, with reasonable returns expected. Investors should adjust expectations – post-Covid levels of 40-50 per cent annual returns are unlikely, but staying invested for the long run will continue to be rewarding.” 

Suri says that Indian markets were in an earnings upgrade cycle post-Covid, but over the past 6-9 months, earnings expectations have been revised downward in line with broader GDP growth. Despite this, India’s macroeconomic fundamentals remain resilient, with steady GDP growth at 6.5 per cent, declining inflation, and strong DII inflows, he says.  

“While FII selling has been persistent, a turnaround is expected. Though short-term corrections are possible, long-term prospects remain strong,” he adds.