Equity or debt: What’s your bet?

As an investor, your aim is to grow your money. In order to do this, you may opt to invest your money in various financial instruments – ranging from bank FD’s [conservative approach] or shares [opportunistic approach].

If we broadly classify investment – it falls under 2 major categories –

1)      Debt         and        2] Equity. 

Debt products are investment products that aim at capital protection and generation of fixed returns. The risks as well as returns in case of debt instruments are lower in comparison to equity instruments. Various options are available for debt investing such as Government securities, public sector bonds, corporate debentures, certificate of deposits to name a few.

Advantages : Debt Securities

-          Lesser risk compared to investment in equity

-          Returns are predictable, unlike in equity – where fluctuation in returns is very high

-          Interest paid on bonds is usually greater than interest paid by the banks on savings account

If you are looking for higher returns and are willing to take more risk, then equity option suits you better.  When you decide to play in the share market, you are relying primarily on the activities of public companies listed on the stock exchange.  You become a part-owner of the company by buying its shares and in turn will bear the rewards if the company makes profits and the risks if the company is running into losses.  Investment in equity can be done either by purchasing shares directly or by way of equity funds.

Advantages : Equity/Shares

-          Historically, stocks tend to outperform bonds in the long run in terms of returns generated

-          Stocks offer benefits to shareholders in two ways – by way of capital gains and dividend earned on shares

-           Stocks are highly liquid – they can be sold easily at fair price in the market

Types of Equity funds:

Equity funds are funds that invest in stocks/equity either as a mutual fund or as an exchange – traded fund [ETF]. Hence they are also known as stock funds. There are various types of options available in equity funds such as - 

[More on Equity funds in the next post]

So, whether to go in for debt or equity is a choice you have to make by analysing the risk-return tradeoffs of the investments. There is no “golden ticket” that guarantees you return on investments. But at the same time, if you know what exactly you want out of your investments and do a little study, then creating a portfolio that maximizes your returns while minimizing your risk-exposure won’t be that tricky a task!