scorecardresearchEquity vs Debt: Which one is suitable for long-term investments

Equity vs Debt: Which one is suitable for long-term investments

Updated: 05 Jan 2023, 08:04 AM IST
TL;DR.
Various investors keep themselves away from stocks due to the conventional approach of investing, in this article we will make you understand why stocks are better than debts.
Reasons why the stock markets can give you better returns than debt instruments.

Reasons why the stock markets can give you better returns than debt instruments.

You have various financial instruments to invest your money for a longer period of time like commodities, ETFs, or fixed-income instruments, but then why should we choose stocks over several instruments? The answer to this question is very simple, because of growth.

Before starting any long-term investment, having a goal mindset will help you in deciding the risk level you can take. The risk level will help you define which investment avenue is suitable for you and optimise your returns. When your financial objective is short-term, you cannot afford to lose your money in the case of short-term downfall in the market, which is why investing in fixed-income securities can be suitable for your short-term goals.

When it comes to long-term objectives, you can surpass the short-term downfall in the market by staying invested for a longer period of time, which means you can take advantage of growth exposure in the stock markets. Let’s understand the various reasons why the stock markets can give you better returns than debt instruments.

Exposure to industry growth

If you invest in an industry that is growing in the economy either due to government support to such a sector or a rally because of macroeconomic environments, your money will also grow at the same speed. Things you need to keep in mind are that the company you are investing in has sound financials and a growth vision corresponding to the industry vision. Growth potential grows your money simultaneously at the same rate as the company’s growth.

In the case of debt instruments, you will get only a particular fixed rate of interest which will not change till the maturity of your investment, even if the company is growing at a high rate by using your money.

Liquidity

Liquidity means getting access to your money whenever you need it, which is essential for your investment as a lock-in period might give you financial stress by not letting you give access to your money when you need it. You can liquidate your investment in stocks at any time during trading hours.

In the case of debt instruments, there is a lock-in period that you have to follow as you need to hold your debt till your lock-in period ends. You cannot withdraw your money in a time of emergency or use your money for a better investment opportunity.

Additional shares

In the form of bonus shares, you get free whenever the company announces the same and the right shares that the company offers to meet the short-term capital requirements at lower prices than prevailing at the market. All these shares are provided to the existing shareholders only, and companies do offer shares several times which is a crucial advantage of investing in stocks.

In the case of debts, you do not get any kind of bonuses like in shares. The only benefit a debtholder has is the security of the principal amount if it is a secured debt.

The above-mentioned are the most advantageous aspects of investing in the stocks of the company, rather than following a conventional approach of investing in debt for investing to achieve long-term financial objectives. Carefully investing in the stocks will not only help you in growing your money rapidly but also helps you in giving exposure to various other benefits of being a shareholder like bonus and the right shares.

Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com

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First Published: 05 Jan 2023, 08:04 AM IST