Why should I invest in shares, bonds, equity funds, and debt funds?

Well, it is necessary that your total assets should be across a few asset classes. Mostly for the middle class investor these asset classes are equity, debt, real estate and gold. This is called “asset allocation”. Bonds and bond funds give stability to the portfolio because it fluctuates lesser than equity funds. Having a strategy of equity funds, direct equities, bond funds and direct bonds. Bonds mature while bond funds are a great way to defer taxation. As a doctor ages he should invest more in bonds and less in equities.

Why are you saying bonds and bond funds are safer than equity?

Bonds are loans you give an issuer (mostly a company or a government agency) with the expectation that you’ll get paid back, with interest, over a specific timeframe. While there’s always the risk that the issuer will get into financial troubles and may be unable to make the payment on time. This is called a downgrade, but largely this is a rare occurence and is not so common! This is what makes bonds a safe investment.

That’s compared to shares, which are investments in a listed company. Your shares go up and down with the company’s performance, which can be affected by a wide array of factors, including management decisions, government regulations and macroeconomic factors. So shares go up and down much more than the bonds and hence considered more risky. One way to look at risk is to say that in the short run shares are risky, but in the long run it is the bonds which are risky. This is because bonds may not give you “real returns”.

Why do shares go up and down so much?

Ups and downs are completely normal in the equity market. A lot of factors can influence fluctuations—from movements in oil prices, quality of people, market conditions, employment data, interest rates, imports, exports, or even elections. If your plan is to invest for the long term (I mean upwards of 10 years at least), you are bound to experience some day-to-day volatility along the way. However,  historically, the share market has recovered from its downturns, and goes up based on earnings and something called “price – earning” ratio.