While it is essential to have a stable income, you can’t just rely on your savings when building wealth. This is where investments come into play, as they are key to securing your current and future financial security.
Not only will this help you retain your wealth, but also grow it without letting inflation erode its value. Thankfully, there are several instruments you can choose from based on your financial objectives, overall investment goals, and risk tolerance.
Some popular options are fixed deposits (FD) and equity investments. The FD vs equity comparison is an important one to consider as both these instruments are great options for any investor.
However, simply comparing FD vs equity won’t help much if you do not clearly understand how these instruments work. So, read on to learn the difference between FDs and equity investments and how these instruments work.
Factor |
FD |
Equity |
Risk |
With an FD, the risk is little to none. This is because the returns depend on the interest rates, which remain unaffected by market volatility. |
The rewards are high with equity, but that is only because the risk is equally high. If you go all in or do not account for losses, you could risk losing your entire investment. |
Tax |
Interest earned from FDs is taxable. |
You may be subject to long-term and short-term capital gains tax as applicable. |
Returns |
The returns for an FD are informed to you before you take the policy, usually ranging between 6-9% depending on your issuer. |
The returns are based on market performance and movements. Here, timing the market is key to ensuring positive returns. |
Liquidity |
You can’t withdraw your money without prematurely withdrawing the FD, which attracts a penalty. You can, however, avail a loan against your FD. |
You can sell your equity stake at any time if you so wish to. |
Inflation |
Depending on the inflation, there may be instances where the returns from an FD are almost negligible when inflation rates are factored in. |
Investments are rather resilient to inflation as they move with the market. However, inflation does impact volatility and, in turn, influences returns. |
An equity investment is an investment in a company for which you get certain ownership of the company. There are different ways in which you can invest in a company, and when you make an equity investment, you buy the company’s shares.
You can do so directly through the stock market, and various brokers will allow you to buy or sell shares of particular companies. You can also invest in a basket of companies through a mutual fund, which pools together money from various investors and then buys shares in companies across a number of different sectors and sizes.
Managed by professionals, these funds allow you to save the time and effort needed to create your own portfolio of stocks. You can also invest in equity through other means, such as Exchange Traded Funds (ETFs) and Derivatives, such as options and futures, which are typically used by more experienced investors.
In equity markets, with shares and options etc., you can triple your investment within a matter of days if you time the market right. However, you could also very easily lose the entire amount, especially if you do not approach equity investing strategically.
As such, the prime difference between FD and Equity is that a fixed deposit offers modest returns with little to no risk. Equity investments, on the other hand, offer virtually unlimited returns, but this prospect also comes with a major downside or a very high risk.
Now that you are familiar with the nuances of FD vs Equity investments, understand that both investments have their merits and downsides. Your market knowledge plays a major role in deciding the benefits for you when comparing FD vs Equity investments.
If you do not understand the stock market, then you are better off investing in an FD, as it requires no intervention on your end. On the contrary, if your market knowledge is sound, you could use it to your advantage to get higher returns. However, the best approach is to diversify your investment portfolio.
When it comes to the equity vs fixed deposit debate, you can consider investing your money in both and a few others, such as debt, property etc., to maintain a balanced portfolio.
This way, if one sector or investment is not doing well, you can adjust for the losses. The more diversity you achieve, the lesser your risk. Regardless of where you land on the FD vs equity debate, invest easily in the instrument you want on Bajaj Markets.
Fixed Deposit and Other Investment Comparisons |
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Equity does not guarantee returns and is highly volatile. As such, there are a lot of risks involved.
Generally, bank FDs are backed by the government, and the risk is very low. On the other hand, company FDs have stability ratings denoting the safety of your investment. Therefore, the risk of you losing money in an FD is generally low but depends on the issuer you choose.
Investing in equity requires some degree of knowledge about how stock markets work and the nuances of different companies and different sectors, even if investing directly in a mutual fund. If you lack time to get a basic understanding of the same, an FD may be preferable. However, you should always aim for diversity in your investment portfolio.
Interest rates for FDs depend on the financial institution factors like the repo rate. However, be sure that you do not choose an issuer solely on the interest rates. Read the terms of your policy carefully before making any investments.
It depends on your financial goals, risk tolerance, and investment horizon. Fixed deposit is a low-risk investment option where the returns are relatively predictable. Here, the returns are generally lower compared to equity. Equity, on the other hand, carries higher risks but also has the potential for higher returns.
Investing in equity has the potential for higher returns compared to fixed deposits over the long term. Equity investments allow for ownership in companies, and as the companies grow, the value of the investments can appreciate. Fixed deposits, on the other hand, usually offer fixed interest rates and returns.