What are the Differences Between Bonds and Equity?
- 3rd February 2026
- 03:00 PM
- 8 min read
Equity refers to owning a portion of a company, which carries a higher risk but has the potential for significant growth. On the other hand, bonds are loans to businesses or the government that have a set principal repayment and interest rates. However, which one suits you the best is still a source of confusion for beginners.
Understanding the difference between bonds versus equities helps you effectively diversify your portfolio. Both assets offer a varied risk-return balance and respond differently in different economic situations. Let us explore the differences between bonds vs equity and which is better for you.
What are Bonds?
Purchasing bonds is like making a loan to the business. Bonds are a type of debt financing that enables organisations to generate capital by borrowing money from investors, in contrast to equity, which denotes ownership in a business.
The fixed-income structure of bonds provides investors with a consistent stream of interest payments at a fixed rate. Due to this, bonds are a popular investment for anyone who wants to diversify their investment portfolio or find a reliable source of income.
What Is Equity (Stocks)?
In terms of finance, a company’s equity is calculated as the difference between its assets and liabilities on its balance sheet. Investing in a company’s equity or stock entitles you to a portion of the investment.
Equities have been a popular investment option among Indian investors. As per the Economic Times, with USD 1.6 billion remitted overseas, Indian investors are increasingly investing in foreign equities.
Differences Between Bonds and Equities
| Parameters | Bond | Equity |
| Return | stable and yields returns that range from moderate to high, depending on the bonds’ credit quality. | provides greater returns than bonds in the past, but it is more unpredictable and volatile |
| Risk | Less risky than equities, since interest payments are fixed, and bondholders receive payment priority | Higher risk than bonds, since it is vulnerable to market volatility. |
| Bankruptcy | Since bondholders are creditors who have made loans to the company, they are given priority over other stakeholders. | Since they have no legal claim to the company’s assets, equityholders are more likely to lose their entire investment. |
| Examples | Corporate, government bonds, fixed-rate bonds, inflation-linked bonds, and municipal bonds | Stocks, mutual funds, and exchange-traded funds (ETFs) |
Key Features of Bonds
The key features of bonds are:
- Bondholders are categorised as creditors, and bonds are regarded as debt investments.
- Investing in bonds can result in fixed income due to the consistent and predictable interest payments.
- The principal amount of bonds is repaid after a predetermined period of time.
- Due to the set interest rates and bankruptcy priority, it is comparatively less risky than equities.
What are the Types of Bonds?
There is a wide variety of bonds available in the Indian market, including corporate bonds, government bonds, and many more. Some of them are highlighted in the table below:
| Equity Type | Meaning |
| Corporate Bonds | Private businesses issue corporate bonds to raise money, and they have better yields than government bonds. |
| Government Bonds | The Indian central or state governments issue these bonds, which include Treasury Bills, Cash Management Bills (CMBs), and others. |
| Fixed-Rate Bonds | The coupon rate on fixed-rate bonds remains constant until the bond matures. |
| Floating-Rate Bonds | Interest rates on floating rate bonds are periodically changed in accordance with a benchmark, such as the RBI repo rate. |
| Inflation-Linked Bonds | Inflation-related bonds take inflation into account when adjusting principal and interest payments. |
| Municipal Bonds | These bonds are issued to finance public projects by states, towns, cities, or local governments. |
Key Features of Equities
Below are some of the key features of equities:
- Equities offer high potential gains, but come with a larger risk.
- Depending on business results, you can also get dividends while investing in equities.
- You may have a claim on the assets and profits of the firm once you have invested in its equities.
- Equities can also provide you with the ability to vote on board elections and company decisions.
What are the Types of Equities?
The common types of equities are common equity, preferred equity, private equity, and public equity. These are described in the table below:
| Equity Type | Meaning |
| Common Equity | These are shares that give investors voting rights and dividends, subject to the company’s performance. |
| Preferred Equity | Preferred equities are shares offering fixed dividends and priority over common equity in profit distribution and asset liquidation. |
| Private Equity | Private equities are investments in private companies not listed on public exchanges, often involving significant ownership stakes. |
| Public Equity | These are shares traded on stock exchanges, allowing investors to buy and sell ownership in publicly listed companies. |
Equity vs Bonds – Which Should You Choose?
You should choose between equities and bonds based on the above differences. Investors who are prepared to accept volatility in exchange for long-term growth are better suited for stocks. Conversely, bonds are appealing if you value lower risk and steady cash flows.
Many investors would rather have a combination that suits their circumstances than choose one side. You can choose the best balance between the two by being aware of your age, risk tolerance, and financial goals.
Download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free. With PL Capital’s detailed market research, you can easily analyse which is better for you.
How Can You Balance Bonds and Equities in a Portfolio?
By considering the diversification strategy, you can balance both equities and bonds in your portfolio. Since equities and bonds respond differently to market conditions, their correlations are smaller. Therefore, they can perform well in an appropriately diversified portfolio.
Compared to equities, which are riskier and have a more volatile return profile, bonds typically yield a lower but more reliable return. On the other hand, your time horizon, objectives, and risk tolerance should determine the appropriate portfolio composition.
When equities do well, bonds frequently do poorly, and vice versa. However, investing in both asset classes might yield a steady return even during economic downturns and potential gains during times of economic growth.
Final Thought
Understanding the differences between bonds vs equity provides a clear picture to you which one works well with your investment goals and risk appetite. Through efficient asset allocation, a well-balanced portfolio of equities and bonds may provide stability and profitability.
To get started with investments, download the PL Capital application. PL allows you to invest in a variety of assets and build a diversified portfolio.
Frequently Asked Questions
1. What is the main difference between bonds and equities?
A stock is an equity instrument that provides financial gains and dividend opportunities, together with ownership in a company. A bond is a type of financial instrument that offers a set income over time.
2. Which offers higher returns, bonds or equities?
Equities typically offer larger potential returns over the long run, while bonds offer lower, more stable, and predictable income.
3. Are bonds safer than equities?
Yes, bonds come with fewer risks compared to bonds, which come with greater risk and volatility.
4. Can I invest in both bonds and equities?
Yes, you can invest in bonds and equities since they provide security and income from bonds, together with long-term growth from equities. Additionally, it helps strike a balance between risk and return.
5. How do bonds versus equities perform during inflation?
When inflation is increasing, bonds typically lose attractiveness, which causes their prices to decline. On the other hand, since businesses may be able to boost sales and pass on greater expenses to customers, equities may provide superior long-term protection.
6. What factors determine the value of bonds and equities?
Interest rates, the issuer’s creditworthiness, maturity period, and inflation influence the value of bonds. On the other hand, future earnings, growth potential, company performance, and market sentiment influence the value of equities.
