Among the various types of funds, there are equity funds and debt funds. While debt funds invest in fixed income assets, equity funds invest in equity shares. The basic difference between debt and equity is that debt is a company’s borrowed capital while equity consists of the firm’s owned capital.
Equity markets carry more risk than debt markets because equity shares are highly volatile and while their returns are also high, they are not guaranteed. In order to invest in the equity market, an investor will have to put in a lot of research and study the management, balance sheets and financial statements of a company before investing.
On the other hand, the debt market consists of government bonds and so, the returns are guaranteed. The government raises capital in the market by issuing bonds and paying interest to the investors from time to time and returning the principal amount on maturity. It works quite the same with corporate bonds but company defaults may pose a risk. Debt investment returns are moderate but also carry much less risk than equity investments.
Investments in the equity market can be made through:
1. Direct investments, where you buy the stocks listed on the exchange. You should research the companies whose stocks you want to invest in and pick the ones with a high-growth potential.
2. Mutual funds, where the pooled capital from investors will be invested in equity. Here, the investor is not directly involved in the decision-making process and will have to pay a fee to an experienced fund manager to take these calls.
Investments in the debt market can be made through:
1. Direct investments: You can buy corporate bonds directly from the company through private placements. Investment in government bonds can be made through auctions where the RBI organises the sale of these bonds. Investors can opt for the competitive or non-competitive bidding process to participate in these auctions.
2. Mutual funds: Even in the case of debt investments, the mutual funds function in a way similar to that of equity investments. The pooled capital is managed by a fund manager and invested in debt or hybrid mutual funds.