By understanding the different concepts of investing, you can get the desired results in your journey towards building wealth. While there are several aspects that you need to know, understanding the different asset classes you can choose from is one of the most crucial ones. Once you understand these classes, you can create a strategy that can keep your investment and gains safe and stable.
An asset class refers to a group of financial instruments that have similar effects from market movements and similar characteristics. Some of the most common asset classes are equity, commodities, cash, or cash equivalent.
Each asset class has a different risk and return profile that caters to different goals. To choose your ideal asset class or classes, consider your investment goal, along with investment horizon, risk tolerance, and other factors.
Financial instruments are categorised under one asset class depending on certain characteristics, such as:
Based on the answer to such questions, the instruments are categorised to form one asset class.
There is some debate on exactly how many different asset classes are there for you to invest in. Regardless, here are some popular and traditional classes that investors rely on:
Publicly-listed companies offer a stake in their companies through shares. So, you can earn profit through an increase in share price or via dividends that the company offers. The return is related to the company’s performance and market conditions, making it a high-risk asset class.
Additionally, this asset class is further divided based on the market capitalisation. The subdivisions are:
These are options where you earn a fixed income, generally through interest. Additionally, your returns and investment amount are secured, making them a low-risk option. However, the profits gained through some of these asset classes are lower compared to other classes like equity. Some common examples of these are bonds and fixed deposits.
This asset class includes apartments, commercial spaces, buildings, plots, land, and other types of properties. You generally get returns from property appreciation or get a steady rental income stream. It can also include REITs or real estate mutual funds. However, it ishas a high risk as the market is not always monitored or structured.
This asset class includes goods and products that you can trade. Some of the most common ones are precious metals like gold or silver. One key role of commodities like gold or silver is that they can help you hedge against inflation, as the prices are generally high during this period. To earn profit through this asset class, you must buy at a low price and sell at a higher one.
Also known as money market instruments, these offer high liquidity as compared to other options. You can access the money whenever you want, as the funds are held in the form of cash or cash equivalents.
Given this, the risk is low, but so is the potential for returns. Some of the most common options under this asset class are savings accounts and certificates of deposit.
These are options that you can get with an underlying asset that influences the performance and its value. If it goes up, so do your returns and vice versa. Some popular options of underlying assets you can choose from are:
As the name suggests, these are an alternate form of investment options to the traditional ones. You can get high returns, but the risk is high as well. Some examples of alternative investments in India include:
Diversification benefits you by helping you balance the performance of your portfolio. Here is a breakdown of how portfolio diversification is crucial and beneficial:
With this understanding of different asset classes, make sure you choose the right ones. To do that, consider your risk tolerance, goals, investment period, and financial standing, among other aspects. If you are unsure about your portfolio diversification or investment strategy, consult a financial advisor.
1. What are the main asset classes for investors?
Some of the most common and popular asset classes are:
2. How do stocks differ from bonds in terms of risk?
When comparing equities vs bonds, the key difference in terms of risk is that equities have higher risk and bonds have lower risk. This is because bonds offer guaranteed returns as there is a promise of payment in interest. In equities, there is no such guarantee and your returns depend on the company's performance and market conditions.
3. Are alternative investments suitable for beginners?
Yes, alternative investments can be ideal for beginners. However, you need to do thorough research and assess your goals as well as your financial standing, as it is a high-risk asset class.
4. Can commodities help hedge against inflation?
Yes, some commodities, like precious metals, can help you hedge against inflation. This is because they typically see an increase in price during inflation.
5. How do I choose the right mix of asset classes?
To choose your ideal mix from the different asset classes, consider several factors, such as:
