m.Stock by Mirae AssetOpen Demat Account
m.Stock by Mirae Asset
Equity vs. Debt: What's the Difference?

Table of content

Equity vs. Debt: What's the Difference?

The diverse world of investments can be broadly divided into two major categories: Equity and Debt. While equity refers to self-owned capital of a company, debt is a company's borrowed capital. As asset classes, equity and debt are different in all aspects - structure, objectives, risk and returns etc. Hence it's important to understand the difference between equity and debt before investing your hard-earned money. In this article, we will explore the equity vs debt debate.

What is Equity?

Equity, as a direct investment asset class, allows you to buy shares of a company and, in turn, gain its ownership. Naturally, the ownership is proportional to the number of shares you own. In the case of public listed companies, these shares can be freely traded (bought or sold) using a Demat account. Furthermore, you can earn returns in the form of dividends that a company may declare based on its profits for the period. In other words, equity ownership makes you a part of the company’s actual performance. As an owner, you also bear the company’s losses.

Read Also: Everything You Need to Know About Equities

What is Debt?

Debt is the amount borrowed that needs to be paid back within stipulated period with a pre-decided interest. From an investment perspective, debt instruments come with lower risk and volatility as they are usually backed by the government or large corporate entities. Since the risk is lower and the returns more assured, the gains in debt investments are usually lower than in direct equity investments. Common debt instruments include debt mutual funds, government securities, and corporate bonds.

Read Also: What are Debt Funds: All about Debt Funds

Key differences between Equity and Debt

Particulars

Equity

Debt

Ownership

When you buy equity shares, you become owners of a company’s common sharesWhen you buy debt instruments, you are giving a loan to the issuing entity. There is no exchange of ownership

Primary source of income

Equities provide dual source of income - capital appreciation and dividend incomeThe primary source of income with debt instruments is interest

Event of liquidation or bankruptcy

Being owners, equity shareholders have the last claim on a company’s assets. Debenture and preference share holders are given precedenceDebt shareholders are paid first in the event of liquidation, especially in case of secured debt

Risk involved

Equities as an asset class are riskier than debtSince debt shareholders are paid first and principal repayment is more or less secured, the risk involved in debt is much lower compared to equities

Nature of Returns

Equity returns are directly dependent on the performance of the underlying company. In the event of a growth spurt, equities will generate higher returns than debtThe returns generated by debt instruments are lower than equities but they are more or less fixed.

Management and Tracking

Direct and active tracking required along with substantial researchCan be passive in nature with less fluctuations requiring fewer follow ups

Investment horizon

Equities are preferred asset class for long-term wealth creationDebt investments are ideal for short to medium term investment horizon

Which Should You Choose: Equity vs Debt?

There are many things to consider when deciding between debt and equity investments. Let’s break it down.

  • Risk Tolerance

    Initially, you need to take risk into account. Usually, loans offer a regular return and thus are safer than stocks; however, if you want some financial risk for probable higher returns, then equities may be your choice.

  • Investment Goals

    What do you want to achieve with your investments? Are you looking for safety for your money? Or maybe you would like to have some income on a regular basis? Bonds generate regular income while shares may provide long-term growth opportunities.

  • Duration Of Investment

    How much time do you plan to hold the money? The bond market is appropriate for short and medium-term objectives whereas stocks usually outperform other competing options in the long run allowing them to pay better dividends over time.

  • Market Conditions

    Observe what is happening in the economy and markets. For example, bonds often perform well when conditions are uncertain or rates are going up, but stocks usually dominate in humming economies.

  • Tax Implications

    No one likes surprises while filing returns. Therefore, each type of investment must be understood based on how it is taxed. Interest paid on bonds is generally subject to regular income taxes while capital gains from shares might fall into different categories depending on how long they were held.

  • Diversification

    Do not put all your eggs in one basket. In this case, it means that spreading money across various types of assets helps reduce risks associated with concentrating portfolios in a single stock. There is no hard and fast rule that you must invest in either of them. You can make a suitable combination of debt and equity and invest accordingly.

  • Prevailing Interest Rates

    Keep an eye on interest rates because they can affect the value of bonds. When rates fall, bond prices go up; conversely, when rates rise, bond prices typically decline. Understanding these trends will assist you in making better decisions regarding investments.

Remember that it isn’t simply about the difference between debt and equity or choosing one. If you are thinking about buying company shares, then you should check out financial health and growth prospects. And if you are thinking about leaning towards debt investments, look at things such as credit ratings and the ability of the firm to make payments.

Also, keep your investment strategy under review from time to time. Since life changes and so do markets, it is better to modify your plan accordingly.

Debt-to-Equity Ratio

Out of all the ratios available to evaluate a company’s financial status, debt to equity ratio is one of the most important ones. It indicates the financial leverage of the company and its risk profile by comparing the total debt to total equity. Here’s how the debt-to-equity ratio is computed:

Debt to Equity Ratio = Total Debt / Total Equity

As an equity investor, a high debt-to-equity ratio signals you about potential risks, such as higher interest expenses or limited flexibility for growth initiatives. For debt investors, it provides insights into a company's ability to repay its debt obligations.

A high debt-to-equity ratio may indicate higher risk for debt investors too, as it suggests that the company has more debt relative to its equity, potentially impacting its ability to meet interest and principal payments.

SIPs let you invest small amounts regularly, making it easier to stay consistent with your goals. With time, your money grows faster through compounding, helping you get the most out of your investments. Try our SIP Calculator to see how your money can grow and make smarter plans for your future.

More Related Articles

Can Mutual Fund Schemes Invest in Upcoming IPOs?

Can Mutual Fund Schemes Invest in Upcoming IPOs?

date-icon18 July 2025 | 7 mins read

Can Mutual Fund Schemes Invest in Upcoming IPOs? - H1 Initial Public Offerings (IPOs) have become a buzzword among investors looking for high-growth opportunities. Whether it’s a unicorn startup going public or a reputed company entering the equity market, IPOs attract substantial interest. But what about mutual funds — can they participate in IPOs? And if yes, how does it impact you as an investor in a mutual fund? This article explores the role of mutual funds that invest in IPOs, the process behind such investments, and how you can benefit from this strategy. You’ll also gain insights into how fund managers evaluate IPO opportunities and which mutual funds are more likely to invest in them. Role of Mutual Funds in Equity Markets - H2 Mutual funds play a vital role in India’s equity markets. Managed by professional fund managers, these pooled investment vehicles collect money from multiple investors and allocate it across a portfolio of stocks, bonds, or other assets based on the fund's mandate. In the context of equity investing, mutual funds: Provide diversification to small investors Help in price discovery and market depth Act as long-term institutional investors Reduce risk through strategic asset allocation Given their market presence and influence, mutual funds also participate in IPOs, often subscribing to large portions of new issuances. But this activity is more nuanced than simply bidding for shares. Are Mutual Funds Allowed to Invest in IPOs? - H2 Yes, mutual funds in India are allowed to invest in IPOs — both in the primary market (where shares are first issued) and in the secondary market (where stocks are traded after listing). This means mutual funds can apply for shares during an IPO’s book-building process just like retail investors, high-net-worth individuals (HNIs), and institutional investors. SEBI regulations allow fund managers to allocate a portion of the fund’s assets to IPOs, provided the investment aligns with the scheme's objectives and risk profile. For instance: A large-cap fund may only invest in IPOs of companies expected to be included in large-cap indices A multi-cap or flexi-cap fund has more flexibility to take exposure across market capitalisations, including IPOs An ELSS fund (Equity-Linked Savings Scheme) can also participate in IPOs if it aligns with its tax-saving and equity investment objective So, the short answer is: Yes, mutual funds can and do invest in IPOs — but not all funds, and not always. Why and When Do Mutual Funds Invest in IPOs? - H2 Investing in IPOs offers mutual fund managers several strategic advantages, including: 1. Access to Early Growth Potential - H3 Many IPOs are of young, fast-growing companies. By investing early, mutual funds aim to capture the growth upside before the stock gains mainstream popularity. 2. Price Arbitrage Opportunities - H3 If a mutual fund believes that the IPO is underpriced relative to its intrinsic value, it may invest with the intent of benefiting from listing gains or long-term appreciation. 3. Portfolio Enhancement - H3 Some IPOs bring fresh sector exposure or innovation to the market. Fund managers may invest to diversify or rebalance the portfolio with new-age businesses, like fintech or EV startups. 4. Long-Term Bets - H3 Fund managers often look at IPOs with a long-term lens. The goal isn’t always listing gains but building a position in a company expected to perform well over years. 5. Demand and Liquidity Trends - H3 In bullish markets, IPOs tend to be oversubscribed and see strong listing premiums. Mutual funds may participate to ride the market momentum, especially when investor confidence is high. Factors Fund Managers Consider Before Investing in IPOs - H2 While IPOs are exciting, they are also risky and speculative, especially for companies with no prior listing record. Fund managers conduct rigorous due diligence before deciding to allocate your money to an IPO. Here are the key factors considered: 1. Company Fundamentals - H3 This includes examining the company’s: Revenue and earnings trends Debt levels and capital structure Profit margins and business scalability Competitive advantage and market share 2. Valuation Metrics - H3 Fund managers analyse: Price-to-Earnings (P/E) ratio Price-to-Book (P/B) ratio Enterprise Value to EBITDA (EV/EBITDA) These are compared with listed peers in the same sector. 3. Promoter and Management Track Record - H3 A critical evaluation is made on the credibility, governance standards, and historical performance of the promoters and top management. 4. Utilisation of IPO Proceeds - H3 Fund managers study how the company plans to use the funds—whether for debt repayment, expansion, or general corporate purposes. 5. Macroeconomic and Sector Trends - H3 Sectoral outlooks, regulatory policies, and broader market sentiments also influence IPO investment decisions. 6. Anchor Book Participation - H3 Strong interest from anchor investors (like global funds or sovereign wealth funds) signals confidence in the issue, making it more attractive for mutual fund participation. Best IPO Mutual Funds: What to Look For - H2 If you're keen on gaining exposure to IPOs through mutual funds, it's important to choose the right type of fund. While there’s no official category called “IPO mutual funds,” some schemes actively participate in upcoming IPOs. Here’s what you should look for when selecting such a fund: 1. Fund Category and Investment Mandate - H3 Start by checking the category of the fund. Flexi-cap, multi-cap, and mid-cap funds generally have more leeway to invest in IPOs. These funds are not restricted to a single market capitalisation and often aim to capture high-growth opportunities, making them ideal for IPO exposure. 2. Track Record of Participating in IPOs - H3 Review the fund’s portfolio history. Some mutual funds consistently allocate a portion of their assets to new listings. You can find this information in the fund’s monthly factsheet or portfolio disclosure. Look for funds that have a pattern of investing in IPOs over time—not just as a one-off move. 3. Fund Manager's Experience and Strategy - H3 A skilled fund manager makes a significant difference. The manager's ability to evaluate IPO valuations, industry potential, and company fundamentals is crucial. Look for funds managed by professionals with a proven track record in equity investing and a sound IPO selection approach. 4. Diversification and Risk Management - H3 An ideal fund won’t rely heavily on IPOs alone. Instead, it will use IPO investments as part of a broader equity strategy. Ensure that the fund holds a well-diversified portfolio alongside its IPO allocations to reduce volatility and balance risk. 5. Consistent Performance Over Market Cycles - H3 While past performance isn’t a guarantee of future returns, funds that have consistently performed well across different market cycles often reflect strong management and strategy. Look at long-term performance metrics like 3-year or 5-year returns instead of just recent gains. 6. Transparency and Reporting - H3 Good IPO-investing funds are transparent about their holdings. Choose funds that provide detailed disclosures about their portfolio, including new IPO allocations, so you can track how your money is being deployed. Also, read the scheme information document (SID) to understand the fund’s mandate and whether it allows active IPO participation. Should You Invest in a Mutual Fund That Invests in IPOs? - H2 Pros: Access to IPOs without applying individually Professional due diligence and analysis Built-in diversification Potential to capture high-growth opportunities Cons: IPO investments may not always succeed May increase portfolio volatility Returns can be affected by market timing and sentiment If you're a long-term investor, funds that occasionally invest in IPOs can be a good addition to your portfolio — but don’t chase IPO exposure alone. Always assess the fund holistically. Conclusion - H2 Yes, mutual fund schemes in India can and do invest in IPOs, but they do so strategically — not emotionally or impulsively. Fund managers assess multiple factors before deciding to put your money in newly-listed companies. As a retail investor, you benefit from their expertise and risk management process without having to analyse IPOs on your own. If you're looking for exposure to IPOs but want to avoid direct stock-picking, investing in a mutual fund that invest in IPO offers a smart, diversified route. However, always match the fund’s strategy with your risk tolerance, time horizon, and financial goals.

Read More
Mistakes People Make While Investing and How to Fix Them

Mistakes People Make While Investing and How to Fix Them

date-icon10 July 2025 | 7 mins read

Investing can be one of the most effective ways to build wealth over time. Whether you’re investing in mutual funds or stocks, the goal is simple: earning returns that beat inflation and help you achieve financial freedom. However, investing isn’t just about selecting the right stocks or funds — it’s also about avoiding costly mistakes that can slow your progress down.

Read More
How Can ELSS Funds Be Redeemed? Rules for ELSS Withdrawal

How Can ELSS Funds Be Redeemed? Rules for ELSS Withdrawal

date-icon26 June 2025 | 9 mins read

Equity-linked Savings Schemes (ELSS) are a type of mutual fund in India that provide tax relief under Section 80C of the Income Tax Act. ELSS have a three-year lock-in period, during which the amount invested cannot be withdrawn. It is important for investors to know the ELSS redemption process, rules, and tax implications while making their financial plans. This article explores the intricacies of ELSS mutual fund redemption, shedding light on the procedures and considerations.

Read More
View All

FAQ

Which is better, debt or equity mutual fund?

The decision to invest in either debt or equity mutual funds is determined by several factors such as the investor’s financial goals and risk tolerance. These factors also form a basic difference between debt and equity mutual funds. Debt funds have lower risks since they deliver stable income from interest; conversely, equity funds generate higher returns via dividend payments and capital gains at a higher risk.

Is debt mutual fund safe?

Yes, debt mutual funds are seen as being quite secure compared to their counterparts in the equity market making them suitable for new investors. They provide predictable returns and tend not to fluctuate much due to lower volatility compared to riskier assets; therefore, they are more reliable sources of income. However, they may offer lower returns than equity funds.

Is equity good?

In case you are an aggressive investor and have more tolerance for high risk, then you can opt for equities instead of bonds as they offer higher returns. In contrast, debts, depending on how much of a return one gets, can sometimes be better than equities with low but consistent returns.