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 class||Direct Stocks||Mutual Funds||Index Funds||Liquid Funds||Long-term Debt|
|What?||Stocks/Shares ownership in a company||A 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. securities||Long 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 value||When available with a good Potential Upside i.e. future returns||When there’s no better opportunity in Direct Stocks & Mutual Funds||When market gets expensive||Always 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 conditions||Low cost diversification. More predictable returns. Easy-exit when a better opportunity in equity is available||To temporarily park funds and earn close to after tax FD-returns.When the markets move lower, then use it to buy more equity||To provide for Security need|
|Limitations?||Short-term drawdown at stock-level||High cost, Risks that a Fund Manager takes, Not as easy to exit as stocks||No customisation, Not many options available in India||Low returns||Low returns|
|Volatility||Very High||High||Medium to High||Low||Low|
|Invested for?||Long-term||Medium to Long-term||Medium to|
Apart from the above mentioned, there are a few more Asset classed like Cash, Commodities and Real estate.
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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