Money market, as well as business productivity, are both volatile and you will need to deal with it prudently. One of the most significant ways to tackle such situations and survive, excel and be productive is to provide a proper cushion against this volatility. If you are wondering how then continue reading.
To start with, you must know the differences between debt and equity investments first.
- Debt investments are usually in the form of mortgages and bonds that specify fixed payments to the investors along with a specific interest.
- Equity investments, on the other hand, are stocks and are mainly securities that allow you to “claim” on the earnings and the assets of the corporation. Common stocks are traded on various stock exchanges is the most popular equity investment.
Undoubtedly, both of these have immense potential to deliver good returns.
Returns and risk levels
Now that you know the difference, it is time to understand that both debt and equity investments have different levels of historical returns and risks.
- Debt instruments are less risky as compared to the equity investments. These offer a steady and more consistent return, but the rate of returns is usually lower. These are also less volatile as compared to the common stocks as these have fewer highs and lows. It is proven that usually the bonds and mortgage market factually experience fewer changes in price. Apart from that, the bondholders get paid first than the stockholders, should a company be liquidated. The mortgage investments some with a specified rate of interest like all other debt instruments and usually have real estate collateral as a backup.
- Equity investments, on the other hand, can provide you with a fortune or you may lose it altogether. Any stock market changes in share value at a rapid pace making it extremely volatile. More often than not, these wide swings in price do not reflect the solidity of the company and are usually backed up but by social, political, or governmental issues especially in the home country of operation of the corporation. If you are okay with taking up higher risks, then equity investments are just for you to earn a potentially higher reward.
The legal differences
The next thing to understand is the legalities involved in debt and equity instruments to have a better insight. Both these may have different names and forms, but both of these are typically corporate borrowing. This means that the company borrows from a large variety of investors instead of borrowing the same or a lower amount straightaway from a commercial bank as a loan.
It is, for this reason, debt instruments like bonds usually come with a specified interest rate just like any other loan. Equity investments in the form of stocks, on the other hand, offer a sort of ownership position to the investors in the company. However, the percentage of ownership will depend on the number of shares and stocks owned by the holder as compared with the total number of shares issued by the company to the public.
Your investment goals
The amount of influence that these differences will influence your preferences will largely depend on your goals. It is a common practice amongst investors to prefer equity investments hoping for a higher return, but debt instruments will offer less risk as compared to the equity investments. The chances of losing money or returns and resulting in crumbling financial health are minimized in debt instruments, but this may not be the favored one for those investors who are looking for more growth and profit potential.
- Making a safe investment is always desired by all investors as that will eliminate the chances of running into debts and look for debt management alternatives and debt relief programs from sources like nationaldebtreliefprograms.com and others.
- Therefore, focusing on debt instruments will provide you with a consistent income at less risk. It is recommended that you tailor your investment actions according to your objective and level of risk tolerance.
- Know the trend of the rate of interest and not your age when you make any investment. You must always focus on fixed-income products considering the rate of interest that it provides.
The debt funds usually invest in a variety of debts and securities that provide a fixed income of different credit quality and maturities. This will not only offer a decent return but will protect your investment from the equity market volatility.
Reasons to invest
There are several reasons to invest in debt and can be evaluated as under:
- The yield curve is one significant reason to invest which is usually high in different bonds whether it is government or corporate bonds.
- The rate of interest and the price of bonds are two different factors that will play a significant role to influence your investment decision. Both of these share an inverse relationship. The rate of interest will increase the prices of bonds will fall because the bank deposit rates will be a far better yield than these bonds due to low interest rates.
It is this time when you will see that most of the investors will sell their bonds in secondary markets and will make investments in bank deposits that are risk-free. This means you will experience a significant fall in the prices of the bonds.
The diverse debt securities and varying maturity periods is another factor to make such investment provided you know how to tide over the market volatility. The fixed income factor along with the debt space is another reason why debt investment is an attractive option overall, as compared with the popular corporate and bank fixed deposits.
There are a variety of debt funds to choose from which is another reason to opt for these. Having different tenures, portfolio composition and investment objectives these debt funds may be classified as income funds, liquid funds, gilt funds, ultra short-term funds, hybrid funds, and fixed maturity plans. Apart from that, you can also choose from close-ended funds, floating rate funds, and capital protection funds as well. There is something to invest for in all seasons.