Should you invest in equity or debt?
Because equity investments are higher risk, they often have higher rewards too. The rewards aren't guaranteed, but when you do profit, it's usually at a higher rate than you'd earn from debt investments. Debt investments do have a guaranteed rate of return, but there is still a level of risk you take.
Generally, debt funds are considered safer than equity funds because they primarily invest in fixed-income securities with lower volatility. However, the level of safety depends on the credit quality and maturity of the underlying securities.
It depends. Debt financing can be riskier if you are not profitable as there will be loan pressure from your lenders. However, equity financing can be risky if your investors expect you to turn a healthy profit, which they often do.
Unlike debt financing, equity financing mitigates the risk of default since there's no obligation to return the investors' money in the case of business failure. However, it introduces the risk of investor influence, which can shift the company's trajectory and affect its culture and founding principles.
The main benefit from an equity investment is the possibility to increase the value of the principal amount invested. This comes in the form of capital gains and dividends. An equity fund offers investors a diversified investment option typically for a minimum initial investment amount.
Indeed, debt has a real cost to it, the interest payable. But equity has a hidden cost, the financial return shareholders expect to make. This hidden cost of equity is higher than that of debt since equity is a riskier investment. Interest cost can be deducted from income, lowering its post-tax cost further.
Debt instruments are essentially loans that yield payments of interest to their owners. Equities are inherently riskier than debt and have a greater potential for significant gains or losses.
Risk Factor: Understand the risk potential for both types. Debt funds offer less risk, a lower chance of capital loss, and reduced potential returns. In contrast, equity funds involve more risk, a higher chance of capital loss, and greater potential returns.
- Qualification requirements. You need a good enough credit rating to receive financing.
- Discipline. You'll need to have the financial discipline to make repayments on time. ...
- Collateral. By agreeing to provide collateral to the lender, you could put some business assets at potential risk.
While average ratios, as well as those considered “good” and “bad”, can vary substantially from sector to sector, a return on equity ratio of 15% to 20% is usually considered good.
How are investors paid back?
Dividends. One of the most straightforward ways for companies to pay back their investors is through dividends. A dividend is the distribution of some of a company's profits to its shareholders, either in the form of cash or additional stock.
If you compare difference between equity and debt mutual funds, equity is more volatile asset class compared to debt. Investors need to have moderately high to high risk appetites with longer investment tenures for equity funds investments.
The 100% equities strategy can prove to be an ideal stock market strategy to focus fully on the most rewarding asset class and make hefty profits along the way.
What explains the superior performance of the 100% international equity portfolio? Stocks have a much higher expected return than treasury bills and bonds. The authors estimate real expected stock returns to be four times those of bonds. After a period of decline, stocks tend to rebound.
You may, but You don't get the best bang for your buck
They are two different things – Nobel Prizes were awarded for that. No matter how aggressive you are, putting 100% in Equities is not efficient – you don't get the best bang for your buck. For high-risk takers, leveraging a risk parity portfolio could be safer.
In general, if your debt-to-equity ratio is too high, it's a signal that your company may be in financial distress and unable to pay your debtors. But if it's too low, it's a sign that your company is over-relying on equity to finance your business, which can be costly and inefficient.
A low debt-to-equity ratio means the equity of the company's shareholders is bigger, and it does not require any money to finance its business and operations for growth. In simple words, a company having more owned capital than borrowed capital generally has a low debt-to-equity ratio.
Generally, a good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry, as some industries use more debt financing than others.
Given the numerous reasons a company's business can decline, stocks are typically riskier than bonds. However, with that higher risk can come higher returns.
The main types of financial securities are bonds and equities. Bonds are debt instruments. They are a contract between a borrower and a lender in which the borrower commits to make payments of principal and interest to the lender, on specific dates.
How does an investor make money from an equity investment?
Dividends are a form of cash compensation for equity investors. They represent the portion of the company's earnings that are passed on to the shareholders, usually on either a monthly or quarterly basis. Dividend income is similar to interest income in that it is usually paid at a stated rate for a set length of time.
Since Debt is almost always cheaper than Equity, Debt is almost always the answer. Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders' expected returns are lower than those of equity investors (shareholders). The risk and potential returns of Debt are both lower.
So, ideally, the best time to invest is when interest rates are falling or are expected to decline. When the interest rates are going down, the bond prices rise, and consequently, the NAV of debt funds also increases. As a result, debt fund investors benefit.
| Scheme Name | Expense Ratio | 1Y Return |
|---|---|---|
| SBI CRISIL IBX Gilt Index - June 2036 Fund | 0.28% | 9.37% p.a. |
| Kotak Nifty SDL Jul 2033 Index Fund | 0.2% | 9.13% p.a. |
| UTI CRISIL SDL Maturity April 2033 Index Fund | 0.16% | 9.11% p.a. |
| Bandhan CRISIL IBX 90:10 SDL Plus Gilt- April 2032 Index Fund | 0.16% | 9.05% p.a. |
- HDFC Corporate Bond Fund.
- Aditya Birla Sun Life Corporate Bond Fund.
- ICICI Prudential Corporate Bond Fund.
- Sundaram Corporate Bond Fund.
