Finding a balance
How to find harmony between equity and debt investments?
As a personal finance commentator, I often struggle to introduce the benefits of equity investment to my generation and the older lot. Habits, after all, die hard. For middle-class families like mine, we’ve been conditioned to rely on fixed-income assets. If you visit anyone nearing 50 or above, you’ll likely find a neatly organised file of their fixed-income investments. NSC certificates, bank FD receipts, and PPF passbooks are carefully tucked away alongside other important documents. You may even find FDs in the names of minor children and spouses, further reinforcing this reliance on safety-first financial habits.
Contrast this with the younger generation of investors, particularly those under 30, who are the complete opposite. They rarely own physical documents for their investments. Everything is digital — held on mobile devices or in the cloud. They primarily use apps for investing, and many are well-versed in equity markets. Some even go all-in on equities, with 100 per cent of their portfolio allocated to stocks. However, the recent market correction of nearly ten per cent has shaken many of these young investors to the core.
So, which approach is right? The truth is — neither is entirely correct. At he risk of sounding repetitive, I must emphasise again — the art of investing lies in finding a balance between equity and debt.
What are equity and debt?
Equity is about becoming a partner in a business. Debt is lending your money to a business in return for a predefined income or interest.
The key difference lies in certainty — with debt, your returns are steady and predictable, arriving within a predefined timeframe. Equity, on the other hand, offers no such guarantees. If the business profits, you earn money; if it incurs losses, you lose money.
The way forward:
No investment plan for a typical middle-class household is complete without a mix of both equity and debt. Why is this balance necessary? Because relying solely on debt investments won’t give you inflation-adjusted returns. Over time, this means your money won’t keep up with rising prices, leading to compromises in your future lifestyle.
How to mix both:
Is there a perfect formula or ratio? While there are several methods an investor can use, no single formula works universally. This is because individual financial needs differ greatly. Moreover, as you progress through different life stages, the proportion of debt and equity in your portfolio should change.
Here’s the general principle:
· For immediate needs, prioritise debt to ensure stability and liquidity.
· For long-term goals, allocate more to equity to maximise growth potential.
Conclusion
Robert Frost wrote in his famous poem, The Road Not Taken: “Two roads diverged in a yellow wood.” But as an investor, you cannot afford to choose only one. Unlike Frost’s lone journey of taking the road less travelled, your financial path must combine both roads — equity and debt — for a more secure and rewarding journey.
(Email: dipankar.jakharia@gmail.com)
