Fixed income and equity are two different types of asset classes, each having distinct characteristics. The nature of securities traded in both of them is different in terms of risk and return. Investing in equity markets and fixed income markets is essential to provide a balance to your portfolio and address life goals. Let’s dig deep to understand their several aspects.

What is Equity Market?

The equity market, also known as the stock market, is where you can trade in shares of listed companies. The securities traded in equity markets are known as stocks. When you invest in a stock of a particular company, you become its partial owner. In India, you can trade in stocks via the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) with the help of registered brokers.

The equity market is an aggregation of buyers and sellers, and with equity sales companies access capital. In other words, they obtain money for running their business while you, as an investor, gain from the appreciation of prices of your chosen stocks in the future. While stocks dominate equity markets, they also consist of assets such as mutual funds and derivatives.

How Does the Equity Market Work?

Now that you know what is equity market is let’s understand its working mechanism. Initially, a company gets listed in the primary market through initial public offering (IPO). Through IPO, an entity offers shares to the public for the first time. An IPO opens for a particular period within which you need to bid for the shares and purchase them at an issue price as announced by the company.

After this, the shares are distributed in the secondary market. It’s the market where buyers and sellers directly meet. Once the shares are listed, their buying and selling occur through brokerage firms that act as middlemen.

It’s your stockbroker who passes your buy order for the shares you want to purchase to the stock exchange. On the other hand, the stock exchange finds the sell order for the share you want to buy. When both buyer and seller are found and the final price is fixed, the stock exchange informs your broker about the same, who then passes the information to you.

The settlement cycle has now come down to T+2 days, which means that the share you buy gets deposited into your Demat account in two working days.

What is Fixed Income Market?

A fixed income market is a market that deals in the trading of fixed income securities such as corporate and sovereign bonds. By investing here, you can earn a regular income that can be monthly, quarterly, half-yearly, or yearly. The asset classes traded in the fixed income market have a lower risk than that in the equity market.

The returns are also modest as compared to equities. If you have a low-risk tolerance level and want assured returns, then you can invest in a fixed income market.

How Does Fixed Income Market Work?

Now that you know what fixed income market is let’s understand the way it functions. In a fixed income market, Government and corporates borrow money from investors by issuing bonds. Once you buy them, you lend money to the entity on which you are paid interest. Upon maturity, you also get back the principal amount.

Difference Between Equity Markets and Fixed Income Markets

When it comes to understanding the difference between equity and fixed income markets, there are primarily two things to consider - risk and return. The quantum of risk is higher in equity markets as compared to fixed income. On the other hand, this high risk also holds the potential to deliver higher returns.

Also, it’s vital to note that returns are not fixed in equity markets. It depends on several factors. However, when you invest in securities traded in a fixed-income market, you get assured returns. The table given sums up the difference between both these markets on the parameters mentioned above.

Who Should Invest in Equity Markets?

Ideally, if you have a high-risk tolerance and can stomach market volatility, you should invest in equity markets. Also, if you want to accomplish long-term goals such as children’s higher education and retirement with relative ease, you must look forward to investing in equity markets. This is because equities have the potential to deliver inflation-indexed returns in the long term. You can invest in equity markets directly through stocks or mutual funds.

Direct stock investing is advisable if you can track market movements and read between numbers. On the other hand, if not, it’s advisable to invest via mutual funds that offer professional management and diversification.

Who Should Invest in Fixed Income Market?

If market volatility makes you jittery and you want assured returns, then you should invest in fixed income markets. Investing in fixed income securities offers guaranteed gains and provides stability to your portfolio.

Even if you have an aggressive outlook, it makes sense to expose a specific portion of your portfolio to fixed income instruments to give it the required balance. Also, if you are looking forward to accumulating funds for short-term goals such as going on a vacation, down payment for car/home and so on, you can contemplate investing in the fixed income market.

Conclusion

Fixed income and equity both have distinct roles to play in your portfolio. They have their upside and flipside. Invest in them based on your risk tolerance and the goal you seek to achieve. The right dose of equities and fixed income can help you embark on your journey to financial freedom.

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