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You can import either Photoshop or Illustrator graphics into After Effects. I recommend that you start with what you already know. If you are comfortable with Photoshop, then use it to create your characters. You could always learn some Illustrator down the road, but why delay starting a project if you can use a tool you already know.
Great advice from Theresa.
The main differences between the two applications are in the way images are produced. Photoshop is based around creating and manipulating images as pixels i.e. manipulating the dots that make up an image.
Illustrator is based around creating and manipulating images as vectors i.e. it stores a drawing as a set of instructions to draw a line from A to B and fill with colour Y etc. These are well suited to a graphic look.
Of course nothing is that simple and the lines are slightly blurred. Photoshop can draw with vectors (using the pen tool and shape tools) and you can bring pixel images into Illustrator.
If you were starting from scratch, not knowing either application, I would advise starting in Illustrator for your purpose. However if you are already familiar with Photoshop, I would advise you follow Theresa's advice and draw with what you know.
It might be worth also having a look at Adobe Animate as it comes as part of the Creative Suite.
Thanks for your amazing response which cleared my confusion in choosing between the two software. I have one last doubt please....
Is their something which I will be missing if I don't have illustrator?
The whole point of me asking this is that weather choosing Photoshop over Illustrator will cause any downgrade to my animated video in AE or can I get the same high end result using Photoshop vs the guy who used illustrator? If I get the same result then why would I bother to buy illustrator when I have Photoshop already bought and am comfortable with, I'll only think to buy illustrator if I'm loosing on a veryyy big feature that will seriously make my animation video less professional as compared to the guy who used illustrator.
You can get a high end result by creating your characters in Photoshop, and you won’t lose out on a big feature without Ilustrator. The biggest difference is in the drawing of vector shapes. Illustrator handles this better because the application is designed to work with vector, however you can also draw vector shapes in Photoshop. In Illustrator you can combine shapes with different fills and stroke colors in a group, or together on a layer. In Photoshop each shape layer has the same fill and stroke color. So, the Photoshop layer panel could get unwieldy large if you draw your characters with vector shapes. Work with Layer groups in Photoshop to keep it organized.