“Bonds vs Equity – Where to Invest?”
"Bonds vs Equity - Where to Invest?"
Investors often contemplate whether to invest their surplus funds in fixed income – bonds or in equity before making a decision. While both options are viable, there is a significant difference in their annual returns – where the average annual return potential for bonds ranges from 4 to 7%, investing in a reputed equity for the long term can yield much better returns. For example, Tata Steel has delivered a 3-year return of 188%.
Historically as well, in terms of returns, equity has always been outperformed bonds.
“In equity, investors become shareholders of the company and they also receive a part ownership of the company on the basis of equity shares. As these shares appreciate, the shareholders’ capital grows, and if dividends are distributed, they receive dividends too.
In bonds, investors lend a principal amount to the company and receive fixed interest on that loan. Upon the maturity of the bond, they also receive their principal amount back.”
Difference Parameter | Equity | Bonds |
Types | Company equity shares, Bonus shares, Employee Stock Options | Government Bond, Corporate Bonds, Municipal Bonds |
Returns | The return percentage depends upon the stock’s appreciation. It can increase or decrease. | The return percentage is fixed here |
Dividends | Companies may distribute yearly dividends. | There are no dividends here. |
Risk-o-meter | Riskier than bond | Low risk |
Liquidity | Highly liquid. You can buy and sell equity shares as and when you want on the stock exchanges | Less liquid than equity |
Who Should Buy? | Aggressive investors who want to increase their principal amount significantly in long run | Conservative Investors who want regular interest amount on their principal amount |
Investment Tenure | 5 to 10 years, 10 to 30 years | 1 day to Long-term. The longer you keep, the better percentage yield you get.. as you average out the market volatility |
If the worst happens | Shareholders are the last person to get paid in case of bankruptcy | As lenders, bond holders are paid a on priority basis in case of bankruptcy |
Bonds or Equity? Choosing the Right Investment
“Whether you are investing in bonds or shares, it is very important to measure your risk tolerance beforehand. Always remember a thumb rule when investing – Do not invest what you cannot afford to lose. That’s why professional advisor or experts’ consultancy is often very necessary… because they diversify your investment in a much better way according to your risk.”
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