An asset class is a collection of securities, manifesting comparable traits and goes through
similar market fluctuations. Securities in one asset class are almost always bound by similar
legalities. Experts put different investment tools in various asset classes to help investors
diversify their portfolio easily. 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.
Types of Asset Classes
There can be numerous criteria to classify asset classes. You may classify them based on
purpose i.e. whether it is a consumption asset like oil and natural gas or whether it is an
investment asset like stocks and bonds. You may also categorize them on the basis of 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, 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. But is this an investment though? 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.
And you earn steady returns as promised at the time of investing. You may get 7%-8% returns
on Fixed Income schemes, but they are not inflation-beating returns. Subject to STCG or LTCG
as per the tenure, fixed income schemes only offer security and not wealth-growth.
Equity asset class is a fascinating one and has been gaining popularity in the 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
Among equity investments, Equity Linked Savings Scheme (ELSS) is the only tax-saving (under
section 80-C) and wealth-building scheme with the shortest lock-in term of 3 years. But equity
investments (including ELSS) work well when you invest for the long term as they have
historically delivered 16%-18% returns and rising above inflation. Choose an AMC with a
proven record, if you are planning to invest in equities.
Real estate asset class, as the name implies, focuses on plots, apartments, commercial
buildings, industrial areas, villas etc. The millennium has witnessed a growing interest in real
estate investments, exacerbated by the launch of Pradhan Mantri Awas Yojana i.e. house for
all scheme. This is not just in urban areas, but in semi-urban and rural regions too. However,
property market can be rather unpredictable and there are numerous factors like city planning,
socio-political scenes, and project movement that decide the returns. This is one asset class
that is not always structured or monitored.
Commodities can be anything ranging from goods, properties or products that can be traded
for different purposes. Gold, silver, bronze, food crops, petroleum etc. are some examples of
commodities under the asset class, and the market undercurrents vary for each. The price can
rise or fall as per the demand. Merchandises are not meant for long-term investments unless it
is gold or silver. Just buy when the prices are down and sell when the prices go up.
Cash and Cash Equivalents
These are also known as money market instruments. It is not confined to currency, but also
idle money in savings account or any other liquid schemes. Nothing gives more transactional
freedom than cash. Many people are reluctant to invest money except in savings account
because they don’t have faith in any investment schemes or to use it without any restrictions
at any time. But it cannot beat inflation and the returns too are negligible (not more than 4%).
People often store away cash to evade tax as they are untraceable.
A derivative refers to a financial security whose value depends on the underlying asset or
group of assets. Standalone, the derivative has n value of its own and its price is based on the
fluctuations in the price of the underlying asset. It is a kind of contract between two or more
parties who have a right/obligation to perform according to the conditions of the contract.
Commonly used underlying assets are equity shares, bonds, debt, foreign exchange,
commodities, market indices and interest rates.
An alternative investment relates to an unconventional asset and is not one of the traditional
asset classes like equity, debt, and cash. These are mostly held by institutional investors or high
net worth individuals owing to their complex structure and limited regulations. These attempt
to generate exceptionally huge returns but are highly illiquid and risky at the same time. Some
of the alternative investments found in the capital markets are hedge funds, bitcoins, artworks
and structured products.
Diversification of Asset Classes
Importance of Equity as an Asset Class
Why Are Equity Funds Useful in an Investment portfolio
4 Reasons why Equity outperforms other asset classes in the long run
8 secrets of making money from investing in stocks