Equity Investment vs Debt Investment – Knowing The Differences
As an investor it is only fair to expect valuable returns on your investments, however, you need to know where to invest and how to invest to accomplish your financial goals. In this write-up, we provide valuable information on different between equity and debt investments.
Several amateur investors often tend to hold back in putting their hard earned money in stock market. This is mainly because they do not have much knowledge about how the stock market works and are afraid of various technicalities associated with investing. However, in reality, investment is not as difficult as it may sound. A good understanding of the basic terms will greatly help you make the right investment decisions as well as hold you in good stead in maximizing your returns. Once you have decided to invest in stock market, the next step is to decide whether you want to invest in equities or debts. If you don’t know how debt and equity investment works, understanding the basic difference would help you make the right choice.
Equity investment means you are investing the company’s shares and the returns you get depend on whether the company that you have invested in has made profits or not. Say, you invested in Birla Sun Life frontline equity fund. If you wish to calculate the returns this fund generated, then calculate by dividing the net income of the fund by the total amount invested.
Debt funds invest in bonds, shares etc. It provides fixed income and the returns are calculated in a way the profits earned by the company for every rupee that it holds in debt. Both equity funds and debt funds have their own advantages as well as risks involved.
As compared to debt investments, equities funds are more dynamic. They are regularly monitored by the fund managers and although the risk involved in equity investments are high, the returns are also quite high. However, the returns on equities greatly depend on the volatility of the market. Thus, if you are willing to take risk, then equity funds would be a good investment choice.
Debt investments are more stable and they offer only a fixed amount of return for a particular period of time.
If you have invested in the equity shares of a company, then you get ownership rights equal to the percentage of amount invested in the company. However, this is applicable only if you own a significant amount of shares. As an equity investor of a company, you can voice your opinion on important matters pertaining to the operation of the company as well as decide and vote on the company policies.
On the other hand, if you have invested in company bonds then you do not get any ownership rights. But, in case the company files for bankruptcy then the bond holders would be given the top preference for paying off their dues. The equity investors are given the least preference in terms of compensation.
There has been a significant increase in the number of investors investing in debt funds mainly because of the low risk as well as the attractive returns offered by debts.
Disclaimer: Mutual fund investments are subject to market risks. Please read the scheme information and other related documents before investing.