Why you should Step on Equity when you are Comfortable with Fixed Deposit? Fixed deposits are the widely used products for investment for a large part of Indians. You can see most of your relatives and friends are widely using fixed deposit when they have some leftover money.
Also some persons love National Savings Certificate (NSC) in Post office as well. Large network of post offices including in rural India and their agents have successfully roped many investors for NSC and fixed deposits.
The vice versa is more true because the rural population go to the post office agents for investing their money.
The NSCs and fixed deposits are popular because they are easily understood due to fixed rate of return and moreover our negligence towards the equity.
Before we are going to the reason behind our continuous neglect towards equity we have to dig dip on the reason behind popularity of fixed deposits and other investment products with fixed rate of return.
What is Equity?
The dictionary meaning of the equity is ‘the value of the shares issued by the company’.
Buying an equity share is the partially owning the company. How many of the investors think like that. I think very less numbers are driven by the owning of the business rather than some quick profit from trading.
If some company has floated its 1000 shares and which is 50% of the share of the company. You have bought 100 shares of that company which is 10% of total floated share which means you have 5% ownership of the company. Now, if the company makes profit, you may be paid the parts of profit in terms of dividend and/or the value of the share will increase.
At the same time, if the company makes loss, your capital may get down and certainly you will lose your money.
What is Debt?
Debt means money is borrowed from bank or financial organization to run a business. Business is giving back the loan principal with interest. The loan repayment is fixed as the interest has been decided before taking the loan. Moreover, the borrower is liable to pay the money even if the business is not earning money or in loss. The bank or financial organization is not owning the business. They are not taking any risk also. You can invest in debt products such as government bonds, securities etc.
Here, the risk is less and the return it can generate is also less than the equity.
Equity Vs Debt:
- In equity, the business is owned by the equity share holder whereas there is no business ownership in case of debt.
- As you partially own the business, you have to bear the risk of losing money if it is not performing well. The borrower is liable to pay in time with interest even if the business is not performing well and hence, you don’t have any risk of losing money.
- The return on investment in equity is generally more than the debt as you are taking some risk of the business and there should be risk premium over the principal.
- As the business will grow over a longer period of time, you have to wait for long period to have a good return from equity investing. In the other way debt can be for short term period also.
- You can get return from equity in the form of dividend and price appreciation. In case of debt product, you will get return in the form of interest.
Common Behavior of Investors on Equity and Debt:
Being a blogger in the personal finance niche, I am fortunate to meet the people and discuss about personal finance. There I have seen a large number of people are not aware of the basics of equity and debt and the difference between these two asset classes even if they are well educated.
Recently, I have gone through a data that 76% of Indian adult population is not financial literate. This data proves the actual reality that how the people are really poor in managing their money.
People are not able to set their financial goal and do proper asset allocation which is the primary step in a sound financial planning.
I have also seen that people are really fond of fixed deposits, recurring deposits, Public provident Fund (PPF) and NSCs. Moreover, LIC is common investment product among the people in India.
People are not planning their tax saving from start of the financial year. At the end of the financial year, in a hurry, they buy some fixed deposits and insurance to save taxes.
Most of the products cannot beat the inflation also. They avoid the risk by not investing in ELSS (Equity linked savings scheme/ Tax saving mutual fund).
They not only lose the opportunity of increasing the money and beat the inflation but also they are taking more risk of their future with a return less than the inflation.
You have surely heard about the term ‘Mutual Fund’. There is lot of buzz about mutual funds and yes many people know mutual funds as only equity based mutual funds.
Many people are buying mutual funds as some of his/ her friends/relatives invested in the same mutual fund and the friend showed how their portfolio has been increased by multiple times. People jump into that investment without knowing the basics about the investing.
I remember some of my friends were only able to say the name of AMC rather than the complete name of the fund. (SBI mutual fund rather than telling SBI Bluechip Fund-growth)
By now, it is well understood that if you want to beat the inflation and make money over a long period of time, there is no better option other than equity.
But we are not ready to invest in equity because of ignorance among the people and our continuous negligence to take the risk for better return.
When consciousness among the people will grow and they will be able to figure out that the return is proportional to the worth of risk taken, people will show their interest on equity.
People need to become financially literate to assess their financial position.
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