Every investment belongs to one or the other asset class. When you invest, it is vital for you to know where your money goes — to which asset class. Classification of asset classes has certainly made finance more manageable for the investor to comprehend. This article covers the following:. An asset class is a collection of securities, manifesting comparable traits and goes through similar market fluctuations. Similar legalities almost always bind securities in one asset class. Experts put different investment tools in various asset classes to help investors diversify their portfolio quickly.
Risk factors, taxation, return rates, liquidity, tenures and market volatility differ according to asset classes. Hence, investors often rely on asset category diversification to earn maximum returns with minimal costs. There can be numerous criteria to classify asset classes. You may classify them based on purpose, i. You may also categorise them based on location or the markets like domestic securities, foreign or international investments, or emerging markets and developed markets.
However, for now, let us dive into the popular asset classes and explore their distinct characteristics and unique selling propositions. As the most popular among Indians, the fixed income asset class is one of the most trusted and oldest forms of investments. Fixed deposits and public provident funds PPF are two examples of this. However, is this an investment in any case? You are just letting the bank borrow from you under conditions of capital protection, returns in the form of pre-agreed returns and liquidity.
With zero risks attached to fixed income asset classes, you will not lose the money you invest. Moreover, you earn steady returns as promised at the time of investing.
An equity asset class is a fascinating one and has been gaining popularity in recent years. Investing in equity means to buy into a business — when you buy shares of a firm, you have a percentage of ownership. The only hitch is that it comes with a certain amount of risk. Any business takes time to grow, and it is subject to market fluctuations, which can impact the share price.
Among equity investments, Equity Linked Savings Scheme ELSS is the only tax-saving under section C and wealth-building scheme with the shortest lock-in term of three years. The key advantage of a fixed-interest investment is that you know exactly how much you stand to earn over its term, which makes for easy financial planning. Provided the organisation that issued the security does not default, you can even work out precisely when and how much you can expect to receive on a certain date. Because they pay out interest at certain intervals, they can be a good choice if you're looking for an investment that provides a guaranteed, regular income.
However, it's worth remembering that bondholders are, in-turn, outranked by creditors, so there's never a complete guarantee that you'll get your money back should an organisation fail.
Fixed-interest securities can also be impacted by market events in a different way to equities. So, if stocks take a hit, it may be the case that the bonds you hold are experiencing stronger returns. Even though they will provide regular interest that is contractually obliged to be paid, if the organisation defaults, your investment is at risk.
Bonds are traded on the stock market, and they can lose their value if the company runs into trouble, so you're not guaranteed to get all of your money back. Plus, fixed-rate investments are subject to interest rate risk.
When interest rates go up, they remain static, so they become less valuable. However, the opposite is also true, and they can hold more value if interest rates decrease while you're holding them. Typical investments: Buying your own home or a holiday home, investing in buy-to-let.
Investing in property can take many forms, such as buying your own home or getting involved in commercial property, like offices, warehouses, and retail space.
There are opportunities to invest in both small and large-scale projects, ranging from a single buy-to-let to joining an investment fund that owns large-scale commercial sites. Property is an asset class that has a track record of beating inflation. It can be a good long-term investment if you're looking to take advantage of an improving housing market, while renting out your buildings can give you another regular stream of income that you could channel into a savings account or invest in other assets.
The main disadvantage of property is that it's a long-term investment that needs time to produce the best returns. Taking on a mortgage or even buying outright is also a major financial commitment and requires a large initial outlay, so it needs to be an investment that you're going to be comfortable with for the next few years.
There is also a significant risk of over-concentration i. Plus, it's easy to get your money tied up in property, as the market moves slowly, and quick sales are sometimes not possible, so you may be forced to accept a price lower than you paid if you need to liquidate your investment. Typical investments: Purchase of equity in a company listed on the stock exchange. When you buy shares — also known as equity — you are buying a small portion of ownership in a company.
Each share represents a unit of ownership, so the company value is divided by the number of shares to give the share price. Shares are traded on the stock market, where the daily value of each company's shares are listed. There are a number of factors, such as if the company does well or undergoes a merger, that can cause the value of a business to increase and boost the worth of each share.
On the other hand, if the company does badly, the shareholders can face a drop in the worth of their shares. The main advantage of investing in shares is their potential to deliver better profit than lower-risk assets, such as cash and bonds , making them a good choice if you're looking to beat inflation. This can include physical bills and coins and the cash you have in your bank accounts. Cash equivalents, like money market holdings, are highly liquid investments that can readily be converted into cash—usually within 90 days or less.
Unlike stocks and other assets, cash equivalents must have a determined market price that doesn't fluctuate. Tangible assets—ones you can physically see and touch—are grouped into their own asset class.
Real estate is the most common type of tangible assets that people own, but commodities, like gold and livestock, also fall into this category. Generally, these types of assets can withstand periods of inflation.
The purpose of having all four asset classes represented in your portfolio is not only to prevent investment downfalls but also to take advantage of the different strengths of each class. The whole theory of asset allocation is based on diversifying your portfolio by asset class; you never want to find yourself in a situation where your portfolio is reliant on one asset class to carry the weight.
Stocks give you a chance for higher returns, but they also come with more risk; bonds don't offer substantial gains, but they're one of the safer investment options. It's on you to find out which combination of assets makes the most sense for you. The younger you are, the more aggressive your portfolio should be.
As you get closer to retirement, your portfolio should get more conservative because you don't have as much time to rebound in the event of a market downfall. A portfolio that contains only one or two asset classes is not diversified and may not be prepared to take advantage of all the swings the market can throw at you.
But diversification—or at least the degree to which you diversify—is also an individual decision that depends to some extent on your goals and risk tolerance.
If you're particularly risk-averse , you might want to diversify even more or make sure you're further diversified within each class, allowing for minor differences within that class.
If you have nerves of steel and you're lucky enough to have money to burn, you might not want to rely on diversification quite as much but ride the trends of the market instead.
Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.
0コメント