What do I want - Debt and Equity securities?
Almost every day we hear in the news and read in the newspapers about debt securities and equity securities. But, what are they? What is this? Do you need to worry about them? Can these be explained in layman terms and not for someone who has been working in financial services in Sri Lanka for the last ten years or so? This rightBETA guide will help you identify and contrast the two in simple terms.
A debt security is composed of a loan made by a lender to a borrower. Since the borrower has accorded to pay the money plus an interest in a specific date, then a security is created. On the other hand, an equity security is a financial instrument which says that the investor is owner of a determined amount of the corporation, and has right over the assets and dividends of the company.
Is that the only difference between debt and equity?
No. One additional difference is that debt securities involve a fixed rate income, since the interest rate that has been fixed by the lender and this is kept fixed during the term of the debt. Meanwhile, an equity security means that the owner of a share may or may not receive income called dividends. This means that dividend income has a variable rate although some listed companies issue shares with varying features ( For Instance, Preference Shares, Convertible Preference Shares etc) to attract you as investors. Of course, as in all financial instruments, when there is a higher risk, the higher the return over investment (ROI).
Can we buy so called debt securities?
Yes. They are usually offered as debentures in Sri Lanka. For example, a company may need capital to build a new manufacturing plant. Since they have an excellent financial background, they prefer to finance themselves than using a bank. So, they make a public offering of debentures with a determined period and a determined rate. As it can be seen, it's different from shares since it doesn't give to the investor a share in the assets and dividends of the company, nor voting rights at the shareholders’ meetings.
What benefits do I get on debentures?
The main benefit of a debt investment is that it can be used as leverage for higher risk investments in your portfolio. Since debt securities are backed up by big listed companies, they assure a determined level of income for a determined period of time. This can be very useful for planning the future cash flow of any investor in Sri Lanka.
Can I invest in a fund of debt securities?
The answer is yes in Sri Lanka. This means you don’t need to worry about the jargon of such debt securities. Now there are various fund management companies in Sri Lanka and they offer various funds with varying degree of risk.
You are able to choose between medium and long term funds that start with an initial investment of Rs 10,000 in most cases with payments made quarterly, semi annually or annually.
Compare funds that offer fixed rate of income
