An asset class is a collection of financial securities that are grouped according to similar traits. The main asset classes include (1) equities (2) debt (3) commodities (gold &precious metals, agricultural products, energy, etc.) (4) cash (5) currency (6) real estate and (7) alternatives. Each asset class has its unique traits, and each offers its own blend of reward and risk.
Equities
When you invest in an ‘equity’, you buy a share in a public limited company. These equities or shares can be traded on the stock market. You can also invest in equities through mutual funds. As an investor, you can benefit from the equity in the form of capital growth or dividends. You can enjoy capital growth as the share price increases over time, and you can receive dividends when the company makes a substantial profit. Equities are a double-edged instrument that offers reward as well as risk.
Debt
Debt assets are a less volatile alternative to equities, offering steadier returns. They may take the form of debt funds or bonds issued by corporates and public bodies. Fixed Deposits (FDs) and Public Provident Funds (PPFs) are two common examples of debt instruments. The steady rate of return on debt investments can make them vulnerable to inflation. If the rate of inflation exceeds the rate of interest, you could even get negative real returns – so it’s important to know your risk appetite.
Commodities
A commodity is any raw material that can be bought and sold – for instance, gold, crude oil. Commodity prices can be sensitive to geopolitics and trade disputes, as well as the normal fluctuations of supply and demand. So, if you are looking to invest in commodities, it would help to understand the risks involved, and to know your risk appetite. Some sceptics consider gold’s use as investment tool outdated, but experts still recommend them for portfolio diversification. Given their cultural popularity and commercial demand, they will probably remain a safe investment haven. A useful approach is to buy when the price is low with a positive outlook, and sell when the price rises. However, if you wish to create a large corpus, say, for retirement, it would be better to invest for a longer duration. Derivatives, futures contracts and ETFs are popular ways to invest in the commodity market.
Cash
Cash is a simple, liquid form of investment, because you can freely choose to spend or save it as per your needs. Keeping it in a savings account is a low-risk strategy, but the interest rate is also quite low at ~3% and could easily be overwhelmed by inflation. In other words, this is a safe investment but will not help much with wealth creation.
Currency
Currency as an asset class is dissimilar from other well-established asset classes, in both features and market behavior. It has a sizeable and highly active market globally. Currencies have reasonably long price histories, as most modern currencies have been in existence for several decades. Currency is a possible contributor to returns in cross geography investment. Although some experts may not consider currency to be a standalone asset class, for Indian investors, investing in global mutual funds with dollar denominated underlying assets, makes a lot of sense. However currencies are exposed to country specific risk and macros.
Real Estate
Real estate has always been popular with investors, given its potential for high returns. The challenge was always the high investment threshold, but there are now accessible ways (such as mutual funds) for small investors to get involved in property. As India’s rising population seeks out more land and resources, real estate will remain a strong investment option.
Alternatives
The alternative asset class covers securities that do not come under any of the traditional categories. They are complex in structure and thus less popular among the general public. They are usually held by high-net worth individuals and institutional investors. Some alternative investments include private equity, hedge funds, artworks, antiques and cryptocurrency. With innovations in the financial market, these instruments have become more approachable for smaller investors through ETFs and SIPs.
Now you’re aware of the different asset classes, you are well-placed to choose the ones that work for you. There is no ‘right’ asset class – you must choose the ones that suit your risk appetite, financial goals and time horizon. With good decision-making, you can make a profitable return on most asset classes.
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