By Moneyvesta posted on October 17th, 2023

I am confused with investment jargon- what is the difference between equity and bonds?

I want to start my investment journey as I want a portion of my money to grow with time and not just sit idle in bank accounts failing to beat real inflation with time. But whenever I want to start- get confused with investment jargon- some say to invest in equity, some say to invest in bonds, some advice to invest in guaranteed income plans, and then some friends advise me to invest in ULIPs. This ultimate confusion deters me from procrastinating my investment journey and I get stuck in this vicious cycle.

Well, there is nothing to worry about, we are here to help you with these jargons in simple terms!

We will start with the basic difference between bonds and equity. Essentially, bonds and equity are instruments through which organizations raise money. A bond is similar to a loan taken by Governments/Municipalities/Corporations on which they pay interest to investors. When you buy a bond, you are giving out a loan to an organization on which they will pay you interest with time and pay you principal on the maturity date. Equity, however, differs in the sense it gives you partial ownership of the company. As the company grows its business, the value of your ownership in the business grows and therefore, your investment value increases with time.

A Guaranteed Income Plan is a financial arrangement that offers both insurance coverage and a predetermined income stream for a specified period, regardless of market fluctuation. You have the flexibility to tailor the plan to your savings objectives and risk tolerance, enabling you to determine the duration of the regular income payment. However, it's important to be aware that GIPs often come with associated costs and fees, which can potentially weaken the growth of your investment over time. ULIPs on the other hand, give you both life insurance and a way to grow your money, it is subject to market fluctuation. When you pay for a ULIP, some of that money goes to cover your life insurance, and the rest gets invested in different kinds of funds that can go up or down in value, like stocks or bonds. Fees associated with ULIPs can include premium allocation charges, policy administration charges, fund management charges, mortality charges, and surrender charges. These fees can impact the overall returns on your investment. However, others may have less transparent fee structures, therefore it's essential for investors to understand the fee structure of a particular ULIP and how it may affect their investment over time.

Investment can be confusing especially with so many options available. However, it's crucial to keep in mind that your investments should always match your financial goals and risk preference. Before making any investment decisions, it is crucial to consult with a qualified financial advisor who can assess your specific financial situation and provide guidance tailored to your needs. Your financial advisor will help you make an informed choice that aligns with your financial objectives and helps you achieve long-term financial security.

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