Equity vs debt: when and why investors move money between them

How do equity and debt differ?

Equity is a share in companies, so its value moves with their share prices. Debt is a loan that pays interest, so its value moves with interest rates and with the borrower's health. Debt is also called fixed income, because it pays interest on set terms.

Each fall in the table is an index over its own dates. An index tracks a fixed set of securities by set rules. These are indices, not funds, and the windows are past ones, not a pattern.

The riskometer is the risk label SEBI makes every fund show, on six levels from Low to Very High, checked every month. AMFI's illustration rates are the mean of 10-year rolling returns from 1 June 2014 to 31 May 2024. They are 12.42% for the Nifty 50, 7.85% for the CRISIL Composite Bond Index and 6.61% for the CRISIL 10 year Gilt Index. These are past figures.

Debt can lose value too. AMFI says the market value of bonds and similar paper generally moves the opposite way to interest rates. Borrowers can also pay late or not at all. Deposit insurance covers bank deposits, including recurring deposits. It does not cover mutual funds. For the full list of risks, read the risks involved in mutual funds. For bonds as an instrument, see how bonds work. For rates and funds, see how interest rates affect mutual funds.

In mutual funds, the same split shows up as equity funds and debt funds. If you only want to restore a mix that has moved away from your chosen split, rather than change it for a goal, that is rebalancing. To weigh holding only equity against spreading money across kinds of investment, read pure equity versus asset allocation.

Why do investors move money from equity to debt as a goal nears?

As a goal comes closer, there is less time for a fall to recover before you need the money. This is why some investors move money from equity towards debt in the last few years before a goal, and why SEBI's life cycle funds reduce their equity share as the target date nears. A life cycle fund is built around a target year for a goal.

Take a case in numbers. Say ₹6,00,000 was meant for a goal two years away and sat in equity on the NIFTY 50's close of 6,287.85 on 8 January 2008. By the close of 2,524.20 on 27 October 2008 it would have been worth about ₹2,40,865. That is ₹3,59,135 lower on paper.

The index first closed back above its January level on 5 November 2010, at 6,312.45. That took about two years and ten months. Anyone whose goal fell due in January 2010 would have needed the money before the market came back.

This is a price index with no dividends, costs or tax, and the start date was picked to show a bad case. It is not a rule about what markets do.

Now flip it. Someone saving for a goal fifteen years away had time for a fall like that to pass. Same fall, same index; only the years left were different.

Emergency money is a separate pot, set aside first so that a sudden expense does not force a sale when prices are low. See where to keep emergency savings.

How gradually should you move?

Moving in steps over the last few years, rather than all at once, means no single day's price decides the outcome. There is no fixed schedule.

The shape, in words: many years out, the money mostly sits in equity. A few years out, you start moving some of it. In the final year, it sits where a fall cannot hurt the goal much.

SEBI's life cycle funds apply the same idea by rule. Their equity share falls as the target year nears. Mutual funds to pay for your child's education prints the table.

Koshex's suggested horizons differ by debt category. The debt funds page and liquid funds page describe the categories. How to choose the right mutual fund for your goals walks through the factors.

An STP, or systematic transfer plan, is one way to spread the steps.

In retirement planning, some people use a bucket approach. Money is split by when it will be needed (near, middle, far), and each part sits in an asset suited to that wait. The role mutual funds play in retirement planning covers retirement income.

Is now the right time to switch from equity to debt?

No one can reliably tell in advance when markets will rise or fall. What you can know is your goal date. A goal date is a reason to move money; a market level is not.

A headline, a market high or a rate forecast is not a reason either. SEBI's Investor Charter says: "Do not fall for the promise of indicative or exorbitant or assured returns". The value of investment in a mutual fund scheme may go up or down, as AMFI puts it.

Reacting to a fall is the other trap. SEBI's investor site says a smart investor will not panic and sell in a downturn. Instead, they stay calm and focus on long-term goals. A fall is only on paper until you sell; selling in the fall fixes the loss. Should I redeem my funds since the markets are down? looks at that choice.

So ask a different question. How many years are left before the money is needed, and how large a fall could the goal take? Koshex helps you choose a fund that suits your goal and timeline.

How do you move money from an equity fund to a debt fund?

You do it by a switch or an STP within the same fund house, or by selling and buying. A switch moves money between schemes of the same fund house. To move to another fund house, you sell and then buy.

Koshex customers can switch between schemes of the same fund house on Koshex.

SEBI describes an STP as moving an investment from one scheme of a mutual fund to another scheme of the same fund house. It works by redeeming from one scheme and subscribing to the other. One fund house's scheme document says the investor chooses a fixed amount to move at set intervals. Either way, each step is a sale of equity units. Under the Income-tax Act, 2025, a transfer of an asset includes its sale or exchange, so a switch counts as selling the old units and buying new ones. Every step can therefore produce a gain or a loss, and the new units' holding period starts on the switch date. Each step can also carry the exit load of the fund you are leaving. Exit load is a fee some funds charge if you sell within a set time after buying. Selling is not instant either. Redemption proceeds come within 3 working days.

ELSS units cannot be switched out during their three-year lock-in, just as they cannot be sold. Lock-in is a period in which you cannot sell at all.

How to switch mutual fund schemes walks through the mechanics. For putting the money into the debt side in one go or in instalments, see lump sum or SIP: when to invest.

What does the move cost in tax?

Tax falls on the gain in the equity units you sell, at rates set by how long you held them. This is the tax on the move itself. Holding period means how long you have owned a unit, from the day you bought it to the day you sell it.

An equity-oriented fund holds at least 65% in equity shares of domestic listed companies. For such a fund, a gain on units held 12 months or less is a short-term gain, taxed at 20%. A gain on units held longer is a long-term gain. Long-term gains above ₹1,25,000 in the tax year are taxed at 12.5%. That ₹1,25,000 is one allowance per person per tax year, shared across all equity funds and shares.

Cess, an extra 4% charge on the tax, is added. A surcharge is a further charge on the tax once total income passes ₹50 lakh; it is capped at 15% on equity and long-term gains, but not on debt fund gains taxed at your slab rate. A resident investor has no TDS on redemption gains, which means no tax is deducted before the money reaches you.

Exit load depends on the fund's own terms; exit load in mutual funds explains it. Moving in steps can spread long-term gains across tax years, because each tax year has its own ₹1,25,000 allowance.

The debt side has its own rule, for later. A Specified Mutual Fund holds more than 65% in debt and money market instruments. Its units bought on or after 1 April 2023 are taxed at your slab rate when you sell them, whatever the holding period.