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Debt or equity: which option are you best suited for?

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Debt vs Equity Which Is the Best Option for You

Debt or equity: which option are you best suited for?

Investing can be a bit like air travel. You move from Point A to Point B. But, there are hundreds of routes. As Indians wake up to financial investments, they often face a common dilemma between good alternatives. There are plenty of investment options when it comes to mutual funds, stocks or fixed income avenues. But, before you pick the ones that suit you, you must decide whether you want to invest in equity or debt. The ideal answer is different for different investors. Your ability to tolerate risk, your financial goals, your investment horizon all play a role. Read on to know how should you decide which one to choose.

Explaining the basics

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.

The Big Decision

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.

Disclaimer

This document is for information and educational purposes only. It is meant only for use as a reference tool. It has not been prepared for any particular person or class of persons. The products and services may not be suitable for everyone and should not be used as a basis for making investment decisions. This document does not constitute investment advice nor is it an offer, solicitation or invitation to transact in any investment or insurance product. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment. Prior to transacting, you should obtain independent financial and tax advice. In the event that you choose not to seek independent professional advice, you should consider whether the product is suitable for you. You should refer to the relevant offering documents for detailed information.

Standard Chartered Bank does not provide any investment advisory services under the wealth proposition. Standard Chartered Bank in its capacity of a distributor of mutual funds or while referring any other third party financial products may offer advice which is incidental to its activity of distribution/referral..

Mutual Fund Investments are subject to market risk. Read scheme related documents carefully prior to investing. Past performance is not indicative of future returns.

The Online Mutual Funds platform is an EXECUTION-ONLY platform. If you wish to receive advice from us in relation to transacting in Mutual Funds, you should not use the Online Mutual Funds Platform but should instead contact your banker for further information. We are not acting as your investment advisor nor providing investment recommendations in respect of any transaction effected through the Online Mutual Funds platform, and you must not regard it or us as acting in that capacity. You should consult your own independent legal, tax and investment advisors before entering into any transaction via the Online Mutual Funds platform and only enter into a transaction if you have fully understood its nature, the contractual relationship into which you are entering, all relevant terms and conditions and the nature and extent of your exposure to loss.

Tax laws are subject to amendments from time to time. The user/investor needs to verify all the facts and circumstances with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.