Equity and Debt investments are distinct asset categories in which people invest their money. However, novice investors might not be familiar with the difference between the two. This article will enlighten your understanding of these basics of investing.
Equity and Debt comprise different products which offer different rates of returns to investors. Debt instruments are products like bonds, treasury bills, corporate bonds, commercial papers, government securities (G-secs), debentures, certificate of deposits etc. These are investment instruments in the debt market that come in varied tenures. They are issued either by governments or corporates to raise capital.
The key aspect about debt instruments is that these products typically offer a fixed rate of interest known as a coupon rate paid on a monthly or quarterly, or yearly basis, over a pre-determined tenure. The initial amount invested is usually returned at the end of the term of the product.
On the other hand, Equity investments typically involve buying of shares wherein returns come in the form of appreciation in share price and dividends paid by the company (more on that later!). The value of the shares you own can move in either direction, depending on how markets behave. If the value moves upwards, an investor makes a profit but if the value moves downwards, the investor faces a loss.
Investing in debt products is usually considered less risky than equity investing, marking a key difference in the stocks vs bonds comparison. This is because debt instruments guarantee fixed returns for an investor, whereas equity returns fluctuate, as equity markets are volatile. But there is a flipside here, as there is a potential for higher returns in equity investing as compared to debt investing. Another point of difference in debt and equity examples is that debt instruments usually have a fixed term as they come with a specific tenor. On the contrary, there is usually no maturity period or term in equity investments.
Mutual funds pool money from several investors and are managed by fund managers. These funds also invest in both debt and equity instruments. The fundamental difference between debt and equity mutual funds is that the former invest predominantly in government & corporate bonds, and the latter invest mostly in equity securities like stocks. Also, during the liquidation of any listed company, bondholders are given the first preference as they are the creditors. In contrast, equity holders, despite being part-owners, are given the last priority.
You can keep learning investing with MProfit to keep yourself informed about the basics of investing as you embark upon your investing journey. Happy Investing!