Thinking to invest your money? Do you have any idea about different asset classes ?
Searching through the basket of Finance and Investments, you may come across numerous financial products, financial instruments, schemes and plans etc. The money invested in all these fall under one asset class or other.
Now,which category or asset class exactly it falls, you will know as you read further…
Knowing about the various asset classes is an important lesson, every investor whether a newbie or an experienced person should have.Firstly,you should make yourself aware that as and when you invest your money somewhere, it goes to some asset class.
I have tried to explain the things in a simple manner by giving few examples wherever required…
While deciding your Investments, if you know about the different asset classes i.e.where you are exactly putting your money, things will become much easier for you as an Investor.
Once you gain knowledge about asset class, you can move towards asset allocation and build a strong Financial portfolio comprising of diversified financial instruments and products.
What is Asset Class ?
In simple terms, all the financial products or financial instruments belonging to one particular asset class possess similar characteristics like :
- Quantum of Risk Involved is more or less same.
- Expected Returns are somewhat similar(Not exactly same, but of similar nature).
- Liquidity factor etc.
The ones having common characteristics or are similar in nature/behaviour are categorised under the same asset class.
For example, as a new investor if you are given the following choices i.e. you can put your surplus funds in :
- Fixed Income generating financial alternatives like Bank Fixed Deposits(FDs) and Public Provident Fund(PPF) that yield a fixed income.No risk is attached.
- Variable Income (Not fixed) and risky financial alternatives like Equity mutual funds and Direct Equity(Stocks).Returns are based on the performance of the underlying asset.
Now,in the above alternatives, the returns are based on nature of underlying asset.Here, PPF and FDs are of the same asset class and are secure options generating fixed returns.They are of similar nature carrying zero risk and assuring returns after a specific time period.
Similarly, equity mutual funds and direct equity possess similar characteristics, both are risky investments and returns are based on market fluctuations.You can expect high returns from them over a period of time, but subject to market risks.So,these fall under the same asset class.
Now, Lets explore through the different asset classes and discuss each of them one by one.
Different Asset Classes you must know about :
1. Cash and Cash Equivalents :
This seems quite simple to understand, it includes the physical cash that you have. Not only cash in hand but the cash lying in your Bank Savings account and any liquid mutual funds can also be referred to as cash or cash equivalent.
Simply stated, all these are highly liquid i.e. easily convertible and you can use them instantly to satisfy your needs and goals.They have common characteristics and can be categorised under the same asset class.
To sum up this asset class covers :
- Physical Cash
- Bank Savings Account
- Liquid mutual funds
Investment Tip : Cash is not an Inflation beating instrument i.e. having excess cash won’t earn you high returns in the long run.Other than that, money put in Bank Savings Accounts can yield maximum interest of 5-6% p.a. only.
To grab more information on Investment,you can go through one of our popular blog posts : 7 Best Short term Investments in India !
2. Fixed Income :
As the name suggests, fixed income is that asset class where the returns are fixed or you can say there is surety to get returns after a definite period. There is either no risk or low risk attached to this particular asset class. So,the financial products where the returns are assured i.e.you will get back your principal plus interest thereon at maturity, can be categorised in the ” Fixed Income” asset class.
To sum up this asset class covers :
- Bank Fixed Deposits
- Recurring Deposits
- Public Provident Fund or PPF
- Post Office Savings Schemes
- Sukanya Samriddhi Yojana
- Endowment Plans
- Government Bonds
- Debt Mutual funds
Now, you might be wondering,why I have included Debt mutual funds in this category since mutual funds are subject to risk.Yes,there is some risk involved but they are considered a safer option because the underlying asset is Debt.So,debt funds are a secure option than Equity funds.
Investment Tip : You are a safe player, not interested in taking any sort of risk, these options are best for you.You can earn moderate returns and build a good corpus without taking high risks.
Investing in this asset class might not give you very high returns,but provides an adequate capital protection.
3. Real Estate :
This includes physical space like land (plots),building,shop,residential house,residential flats or industrial spaces as well. Investing in this asset class is a fairly big decision that involves a huge sum of money.Since the past decade, the real estate market has been fluctuating a lot, sometimes seeing an upward trend while at other times a downward trend in the market.
Moreover, the returns from real estate are based on various factors like :
- Market fluctuations
- Government Policies
- Political factors etc.
Your property might appreciate immediately or it might take years for its prices to rise based on the factors affecting the markets.However, investing in this asset class especially when it comes to buying your own house has been an all time favourite of the people.
Investment Tip : Practically you should plan to invest in Real estate once you have parked some money for other short term and long term needs like Insurance,Retirement funds,emergency funds etc.So,plan your other Long term Investments before putting a lumpsum amount in buying a house.
Anyways,if you are planning to get your own dream house,have a look at our famous blog posts written especially for first time home buyers : 5 Smart tips for First time home buyers ! and Home Loans -7 Facts you need to know !
4. Equity :
Equity commonly known as stocks/shares refers to ownership i.e. when you buy shares/stocks of a particular company, you become a small owner of that business.Now, this is one asset class that carries the maximum risk and there is no surety of returns.Higher the risk, higher the returns you can expect over a period of time.
Equity returns are highly volatile…huge risk involved.You can gain a lot or loose it all, while investing your money in stocks.So,you have to be extra cautious while investing your money in this asset class.
To sum up Equity includes :
- Direct Equity/Stocks
- Equity Mutual Funds
- ELSS or Equity Linked Saving Scheme
- Exchange Traded Funds or ETFs
Talking about Equity Mutual funds, to enjoy good returns you have to invest your money in Mutual Funds for a longer period and SIP is a good way to do it.
Although,there is risk involved, but we have seen people becoming millionaires by just putting their money in equity.And that involves thorough knowledge of the markets,risks associated and making the right investment choices.
Investment Tip : To grow your money, SIP in mutual funds is also a good option, where you invest small amount every month hence reducing the burden of investing huge amounts altogether. Further,ELSS has its own dual advantages of capital appreciation and tax benefits.
For additional details on ELSS you can have a look at our blog post : ELSS or Equity Linked Savings Scheme – Things to Know !
Go for Equity only if you are a high risk taker.Also, you will have to keep patience and let your money stay invested for a longer duration, to get the desired returns.
5. Commodities :
Commodities refer to the physical goods that can be bought and sold in the market.While Gold and Silver are the most common in this asset class.Examples of other commodities are Copper,rice,pulses,oil etc.The returns on this category are highly volatile.The prices of commodities are based on their demand and supply in the market.
While most of these are commodities are traded for short term due to their perishable nature, Gold and silver are considered as good long term investment options.
Investment tip : Gold has been an all time favourite of Indians and a good long term investment option since ages.No doubt,it has proved to be a wise and safe investment option.Hence,investment in gold shall definitely add value to your finance portfolio.
Also, Checkout our famous blog post : Gold – Is it the Best Long term Investment Option ?
Now, where and how you should invest your money…in which asset class ? This is another set of questions…
Your Investments should be mainly based on 3 things :
- Your Finance Goals.
- Your Risk Appetite.
- Your Investment Horizon.
You are the best judge as to what your finance goals are,why you want to invest,how much risk you are willing to take and for how long you can invest your money.
Have a blend of different asset classes in your Investment Portfolio,you will enjoy good returns over a period of time.Diversify your funds and have a sound Financial Portfolio !
I have tried to cover all the major asset classes through this blog post, feel free to add further if I missed out any….Share your valuable feedback with us in the comment section below…
And yes,if you liked it do share it with your family and friends,after all they also deserve to get this useful piece of information.
Have a safe investment journey !