What are Different Asset Classes?

Last Updated on February 28, 2020

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
Category	Equity	Equity	Equity	Debt	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 Long-term	Short-term	Long-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?’

If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.