Understanding the key differences between equity and debt is important. Once you know the difference, you will go a step closer towards finding the right investment option for you.
Debt is another name for fixed income. You can invest in fixed deposits, recurring deposits, government bonds, company debentures, commercial paper and company fixed deposits. The deposits in the bank are guaranteed provided the bank itself does not fail. What makes fixed income so attractive? Well, the stable nature of return is an important attraction. Equity may move up or down, but fixed income returns operate more or less like a straight line. However, fixed income has a drawback. Its returns do not match inflation if the cost of goods and services keep on rising. So, if your fixed income/debt return is lower than inflation, this would mean you are losing purchasing power.
Equity is an asset class that is necessary for long-term growth of your savings. Equity returns are typically higher than inflation, however equity carries more risk than fixed income because nothing is assured or guaranteed in equity. The risk of loss is high in the short-term, but the risk narrows down considerably if you hold equity for 7-10 years. The duration of your investment can often decide the returns. Equity products are taxed in a better way than fixed income too. Choose debt and equity funds through our Fund Select facility.
To really decide which one among equity and debt is suitable for you, you have to go through some questions. This will really help you solve your dilemma.
- What is my risk appetite – Are you comfortable with large swings in your portfolio? Are you willing to take losses (higher risk) in your pursuit of higher return expectations? Are you looking at capital preservation or wealth creation? An answer to these questions will help you determine the right investment choices.
- Do I need income or wealth – Debt is advisable for those looking to generate income through their investments. This is because debt provides more certainty of return. For growth and wealth creation, equity is the go-to asset class. This is a better option depending on a suitable investment duration and reasonable return expectation. To know what’s happening in markets and to gain insights, read Standard Chartered’s views from experts on the markets. Click here to read now.
- How long can I keep the investment – Investors should select the investment avenue based on the time period at the end of which they will withdraw the investment. Debt can be suitable for 1-5 years. For any duration longer than 5 years, stick to equity. Use the Systematic Investment Plan (SIP) method to make regular investments, instead of doing lump sum investments.
- What are your return expectations – If you expect a moderate 3-7% return and are more focused on preserving your initial investment, debt should be your investment option. This return comes irrespective of the investment holding period (though there could be charges for exiting from the scheme before a specified period). For instance, bank FDs can give you similar returns for such a time horizon. However, if you want to get higher returns than this, debt may not be suitable. You would have to consider equity. Mind you, equity returns are not fixed and so to actually get 10%+ gains, you may usually need to be invested for a minimum of 5 years. Also, you need to be sure that you are investing in the right kind of funds. Do note that your return from debt and equity are linked to your risk-taking ability. If you cannot stomach the risk, do not venture into equity.
Once you have made up your mind about whether it is debt or equity, choose the right product given your requirement and investment horizon. You can obtain fund ideas from Standard Chartered and invest through our online mutual funds platform. If you want to use deposits, check out our competitive interest rates by clicking here.