Key idea
The other side of investing: instead of owning, you lend. Debt offers steadier, more predictable returns, in exchange for less growth.
Where equity is ownership, debt is lending. When you invest in a bond, a fixed deposit, or a debt fund, you are effectively lending money in return for interest and the promise of your money back. The return is steadier and more predictable than equity, and usually lower.
Equity vs debt, side by side
Equity (owning)
- Higher growth potential
- Higher volatility
- No fixed return
- For long horizons
Debt (lending)
- Lower, steadier return
- Lower volatility
- More predictable income
- For stability and near goals
What debt is for
Debt plays defence in a portfolio. It cushions the swings of equity, provides more predictable income, and holds money you may need sooner. It is not risk-free (borrowers can default, and prices move with interest rates), but it is generally calmer than equity.
A portfolio usually holds both: equity for growth, debt for stability. The balance between them is one of the biggest decisions you will make, covered in the asset-allocation lesson.
Finished reading?
Marking this complete counts today, and your streak becomes day 1.