Comparison of Equity and Debt

While deciding upon an investment the most important factors we have to decide upon are –

  • Risk
  • Liquidity
  • Taxation
  • Returns
Risks:

Our investments are exposed to risks such as-

  1. Default risk or Credit Risk
  2. Interest Rate Risk
  3. Volatility Risk
  4. Inflation Risk

This risk is associated with both Debt and Equity. As the value of money goes down due to increasing prices of goods and services, you need to ensure that you earn returns better than the inflation rate.

Liquidity:

Usually, Equity investment is considered to be highly liquid. You can withdraw your money at any point in time from the Shares or the Equity Mutual Funds. However, Debt investment may not always be as liquid as Equity investments. As is seen in the case of an FD or PPF there is a fixed lock-in period.

Taxation:

Taxation on any investment is the amount of Tax you will have to pay on returns of your investment. Once you pay tax on returns (returns are interested in case of Debt and profits in case of Equity) your net returns move down.

In India, Equity investments have better taxation than Debt investments.

Returns:

Here, the Equity investment scores over the Debt investment. Though the Debt investment has fixed interest, they are lower as compared to Equity investments. Equity investment returns, though not fixed, usually are better than Debt investments.

Duration:

You will need to invest for a longer term in Equity investments (5 years and above) in case you wish to earn better returns. Debt investments can be for a shorter duration as well as for a longer duration.

So, as a general understanding, if you want to play safe and you are ok with lesser returns you can invest in Debt.

In case you wish to earn higher returns with some amount of risk you should invest in Equity.

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