Question

It is often stated that fixed income is safer than investing in equities. What is meant by this statement and under what conditions is this statement true?

Answer 1

Fixed income is certainly safer than investing in securities as there is no risk involved as far as income is concerned. Fixed income Investments provide a stable income to the investor whereas investment in equity has no fixed income. Equity income is in the form of dividends which are not fixed and are paid at the discretion of the management. Hence it is said that fixed income is safer than investment in equities. Moreover fixed income investments are either in the form of BANK deposits or debt given to companies. Both of these have to be returned to the investor by the borrower and so even the principal amount is safe. This is not so in stock investments because the company need not return the initial amount of investment.

This statement is true when the equity prices are fluctuating widely and there is high volatility in the share market. It is also true in case of losses faced by organisations in which case dividend is not paid but the fixed interest is still paid out.