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 grouping 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|
|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|
|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|
“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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