Fixed Income vs Equity: Which Should You Opt For Investment?

In India, a general savings account typically offers an annual interest rate of 2.5% to 3% on balances up to ₹1 lakh, which certainly does not beat inflation. Therefore, investing rather than only saving is important to grow your money. 

Now, the question is where should you invest? Fixed income provides stable and guaranteed returns, while equity can deliver higher returns but comes with a higher risk.

In this blog, you will get a detailed breakdown of fixed income vs equity so that you can make your financial planning better.  

Quick Synopsis 

• Fixed-income investments provide steady and predictable returns.
• Fixed-income investing carries less risk and is suitable for conservative investors.
• Equity investments make you a part-owner of the company’s growth and profits.
• Equity carries a higher risk, as share values can decline during market downturns or when a company struggles.

Understanding Fixed Income Investments 

Fixed-income investments offer steady and predictable returns through regular interest payments over a set period. They are popular among low-risk profile investors who want to protect their capital and earn consistent income. 

These investments usually pay a fixed rate of interest and return the original amount at maturity. Fixed-income investments can help balance a portfolio and are generally less risky than stocks. However, rising inflation can reduce the real value of their returns.

List of Fixed Income Investments

1. Bank Deposits (Fixed Deposits): These are safe and come with fixed interest, such as fixed deposits, recurring deposits, etc.
2. Public Provident Fund (PPF): A government-backed savings plan that offers safe returns, tax benefits, and zero risk.
3. Money Market Instruments: Short-term options like treasury bills, commercial papers, and certificates of deposit that mature in less than a year.
4. Corporate and Public Sector Bonds: Companies and listed public sector units issue these bonds to raise funds. PSU bonds are relatively low-risk, while corporate bonds vary in risk and return.

Want to invest in fixed deposits and recurring deposits? Explore the Stable Money platform, where you can start your FD or RD without opening a new bank account, and all these investments are insured by DICGC for up to ₹5 lakh.

What are Equity Investments?

Equity investments involve buying shares of a company and becoming a part-owner. These shares are traded on stock exchanges, such as BSE and NSE. Share prices fluctuate based on supply and demand, company performance, and overall market conditions. 

Equity investing allows you to invest in businesses you trust for capital growth over time. However, it carries risk, as share values can decline if the company or market faces challenges. 

Ways to Invest in Equity

1. Stocks: This is the most common type of equity investment. When you buy shares of a company through a stock exchange or broker, you own a small part of that company.
2. Mutual Funds: Mutual fund houses collect money from many investors, and professional fund managers invest in a mix of different company shares or sectors, offering you instant diversification.
3. Exchange-Traded Funds (ETFs): Similar to mutual funds, but they trade on the stock market like regular shares. Most track an index, which makes it easy to invest in many companies at once.
4. Equity Derivatives: The price of futures and options instruments depends on their underlying shares. However, they are more complex and better suited for experienced investors.

Fixed Income Investments Vs Equity Investments 

To build an ideal investment portfolio, you must invest in both fixed and equity instruments. These are some differences between equity and fixed income investments:

Fixed Income or Equity: Which Should You Opt For? 

What should you choose between fixed income vs equity? Asset allocation decisions depend on several factors, mainly an investor’s financial risk profile. You can consider your age, income level, financial responsibilities, market conditions, etc. 

For example, if you are young and have fewer obligations, you may choose equities for growth, while those with families often prefer fixed income for stability. 

Depending on your profile, you can use the strategy below for ideal investment planning:

• Conservative Profile: 70% - 80% in fixed income for steady returns and 20% - 30% in equities for moderate growth.
• Moderate Profile: 50% in fixed income and 50% in equities for balanced risk and reward.
• Aggressive Profile: 70% - 90% in equities for higher long-term growth potential. 10% - 30% in fixed income as a safety cushion.

However, you must start an FD investment at an early age to secure your future and ensure capital growth over the fixed deposit tenure.