Various Asset class as Investment Avenue

 

We understand that everyone has different goals when it comes to their savings. When constructing your investment portfolio it’s important to understand various asset classes. An asset class is a gInvestment Avenuerouping or broadband of similar investments (like same sector stock) whose prices tend to go in concert. The concept of asset classes is important to understand as one of the common goals when establishing an investment portfolio is to have a diversified portfolio comprised of funds invested in different asset classes.

 

The diversification amongst asset class will reduce overall exposure to risk. Diversification will help you to reduce risk and will tend to perform differently in different market condition. One of the most important decisions investors make is how they divide their investment between different asset, referred to as asset allocation. Diversifying across a range of asset sectors, industries and securities reduce market risk and can improve your performance potential. The goal of diversification is not to boost performance, but it can help set the appropriate level of risk for an investor.  To summarize –

 

  • Asset classes refer to the various assets that are available for investment. (Mentioned below).
  • Different asset class has different risk and return profile, and it reacts differently in different market environments.
  • Based on the personal risk profile and risk tolerance one should invest in a combination of asset classes to optimize his returns.

Various forms of Asset

 

Now let us see the different asset class & their risk, return, and liquidity.

 

Asset Class and characteristic
Category Sr. No Asset class Risk Return potential Liquidity Time horizon
Cash/ Debt Instrument
1 Bank Deposit Negligible Low High Short Term
2 Debt Instrument Nil Moderate Low Long term
3 Bonds & debenture Average Moderate/ High Low Medium term
4 Mutual Fund Debt scheme Average Moderate Low/ High Short / Medium term
5 Fixed maturity plan Average Moderate Low Medium term
6 Govt. Deposit Nil Moderate Low Long term
7 Liquid Funds Average Low/ moderate High Very short term
Equity – Listed** 1 Stocks – Listed High High High Medium / long term
2 Stocks – Unlisted Very high High Low Long term
3 Mutual Fund  – Index Fund Medium Above Average High Long term
4 Mutual Fund  – Equity Open ended fund High / Medium Above Average High Long term
5 Mutual Hybrid Fund Medium / Low Medium / High High Long
6 Mutual Fund  – Equity Close ended fund High High Medium Medium / long term
Equity – Unlisted 1 Private Equity High High Low Long term
2 Venture Capital High High Low Long term
Commodity 1 Precious metals High High High Low / Medium term
2 Agriculture High High High Low / Medium term
3 Energy High High High Low / Medium term
4 Broad basket (index) – Like GSIC Medium High Medium Medium
Real Estate 1 Direct High High Low Long term
2 Commercial High High Low Long term
3 Residential High High Low Long term
4 Property Trusts High High Low Long term
Alternatives 1 Hedge funds High High Low Long term / Medium
2 Opportunistic/distressed strategies High High Low Long term / Medium
3 Arts High High Low Long term
Derivatives 1 Futures High High High Very short term
2 Options High High High Very short term
3 Market Neutral strategy High Above Average. High  Medium term

 

Conclusion

 

“I think it’s a mistake to rely too much on any one economic factor.

It’s why investors try to spread their portfolio around asset class” .Paul Wolfowitz

Historically, it is proven that sound Investment planning does create a success. One has to realize one very important fact that one can predict what future returns.  One has to follow the investment plan while markets will move up or down. So, you need to be prepared for bull and bear phase. If you are investing for the long term, don’t make your investment or asset allocation decisions based on short-term performance of a particular asset class.

 

For a better return, one has invested in growth asset such as equity, commodity etc. at the same time, to meet your short term cash flow objective one has to receive a debt instrument also in the portfolio. The powerful combination of various asset classes along with compound returns can make a big difference to the value of your investment portfolio.

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One Comment to Various Asset class as Investment Avenue

  1. Hi my friend! I wish to say that this article is awesome, nice written and come with almost all vital infos. I would like to see extra posts like this .
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