When you are new to investing you may be confused about where to invest. You can take this decision based on various asset classes. You can invest in different types of asset classes as per your investment goals. In this article, we will understand different asset classes and their benefits.
What is Asset Class?
Asset Class is a group or collection of similar types of investment tools. Each asset class consists of investment tools that have similar traits, behaviours, and regulations. Different asset class carries different taxation, liquidity, volatility, and risk factors.
Different Types of Asset Class
There is no standard type of asset class defined. But as per finance experts following are the major asset classes.
- Equity
Equity means stocks or shares of companies. These are public limited companies listed on stock markets. If you invest in equity by buying shares of these companies, then you become a shareholder of the company.
You can get returns by selling the shares when the price increases and by receiving dividends from the companies. Equity investments give higher returns if invested in the long term.
- Fixed Income Instruments
Fixed income instruments consist of those investment tools that give assured returns. This includes fixed deposits, PPF, bonds, debentures, etc. Fixed income instruments give fixed interest at regular intervals or at the time of maturity.
These are good investments for those who want stable returns and don’t want to take much risk. They are also less volatile as compared to stocks.
- Real Estate
Real estate consists of house property, commercial property, villa, industrial estate, etc. By investing in this real estate, you can earn rental income on a monthly basis. It also gives tax benefits.
- Commodities
Commodities are goods that are used in trade and commerce. Some examples of commodities are Gold, bronze, silver, food crops, etc. The price of these commodities keeps on changing as per demand in the market.
Investors buy these commodities at less price and sell at a high price and thereby earning profit. You can also buy some commodities and store them in physical form.
- Cash and Cash Equivalents
Cash and cash equivalents consist of money market instruments like commercial papers, treasury bills, etc. These are preferred for short-term investments as they have a maturity of one year or less. It also offers liquidity benefits.
Benefits of Investing in Different Asset Class
The benefits of asset class are as follows:-
- Higher Returns
When you invest your money in different asset classes, there are more chances of higher gains. This is because not all asset classes will fall at the same time. If one asset class is not performing, then the other will perform. So in this way, you minimise your loss and increase your profits.
- Reduces Risk
By investing your money in different assets, you reduce the risk. Poor performance of one or two investments will not have a large impact on your entire portfolio.
- Diversification
Each asset class has a different type of investment instrument. So by investing in different classes, you get the benefit of diversification.
- Maintains Discipline
By investing in a different asset class, you are able to maintain discipline in investments. You don’t over-invest or under-invest in a particular type of investment or sector.
Conclusion
If you are about to start your investment journey, then determine your investment goals and then invest in different asset classes accordingly. By investing in a different asset class, you diversify your portfolio and increase the chance of getting higher returns.
