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What are Different Asset Classes?

Team MoneyWorks4Me calendar icon May 01,2018 eye icon970 time icon 2 min read

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An Asset class is like a basket of investment opportunities having similar nature like how it works, risk-return, liquidity etc. Each Asset class is likely to exhibit different risk and return relationship. Popular Assets classes are typically divided into two types Growth & Security. Growth best achieved through Equity—higher returns, higher risk; Security through Debt—more secure, lower returns.

Asset classDirect StocksMutual FundsIndex FundsLiquid FundsLong-term Debt
CategoryEquityEquityEquityDebtDebt
What?Stocks/Shares ownership in a companyA portfolio of stocks (Some  have debt instrument too)A portfolio of stocks that is based on  a particular index (e.g. Nifty 50)Very low-risk fixed-income assets that invests in very short-term debts and Govt. securitiesLong term debt, Govt. securities that give better than FD- returns
When to invest?When fundamentally sound stocks are available at a discount from its fair valueWhen available with a good Potential Upside i.e. future returnsWhen there’s no better opportunity in Direct Stocks & Mutual FundsWhen market gets expensiveAlways a fixed portion to be invested
Why?To earn high returns on a long term basis. No cost investment  in Stocks (except the Demat brokerage)To complement Direct stock investment.  Different investment styles work under different market conditionsLow cost diversification.  More predictable returns. Easy-exit when a better opportunity in equity is availableTo temporarily park funds and earn close to after tax FD-returns.When the markets move lower, then use it to buy more equityTo provide for Security need
Limitations?Short-term drawdown at stock-levelHigh cost, Risks that a Fund Manager takes, Not as easy to exit as stocksNo customisation, Not many options available in IndiaLow returnsLow returns
VolatilityVery HighHighMedium to HighLowLow
Invested for?Long-termMedium to Long-termMedium to Long-termShort-termLong-term

Apart from the above mentioned, there are a few more Asset classed like Cash, Commodities and Real estate. 

You need to look at your Investable Surplus as one portfolio, and allocate it to different Asset classes based on your needs and your Risk Profile. 

Note on Fixed Deposits: Return quoted for FDs is pre-tax return. If it’s 7-8%, then after tax return may be in the range of 5-6%. It may not be adequate to beat inflation! Read this story from Mint newspaper.

 Read the next article to know: Why do you need to do Asset Allocation?

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Tags: Stocks
Category: Learning

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Team MoneyWorks4Me

A team of business leaders, equity research analysts & investment counsellors. Started in 2008; experienced in equity research, financial planning and portfolio management. Passionate about providing institutional quality research and advice to Retail Investors in a simple easy-to-understand-and-act manner.


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