5 Asset Classes Explained: A Simple Guide For Beginners

An asset class is a group of investments that portray similar characteristics. For example, bank fixed deposits (FDs) and Public Provident Fund (PPF) are quite different – they have different taxation rules, their returns vary greatly, and their liquidity also differs. However, fundamentally, these are fixed-income investments that have a fixed term and a fixed rate of interest.

Types of asset classes

Cash and cash equivalents

Cash and bank balances are fundamental assets. You can buy or invest in any other asset class using cash. The most liquid investments carrying minimum risk are grouped under cash and cash equivalents. This asset class includes the following:

  1. Cash
  2. Savings Bank Accounts
  3. Liquid Funds
  4. Money Market Funds
  5. Treasury Bills

You do not earn any return on the cash you hold. However, its purchasing power may rise with your currency in international markets.

Bank accounts provide minimal returns whereas other liquid investments provide investment returns. The post-tax returns are generally close to the inflation. Hence, there is no growth.

Fixed income

These investments generate a fixed return, generally over a fixed tenure. So, they are categorised in the fixed asset class.

The interest earned on these investments is either reinvested or paid out periodically. You receive your invested principal only after the tenure ends. This asset class includes:

  1. Fixed deposits/recurring deposits
  2. Employees’ Provident Funds / Public Provident Funds / National Saving Certificate (Section 80C deductions are available, maturity amount of EPF & PPF is exempt from tax)
  3. Debentures / Bonds
  4. Debt Mutual Funds
  5. Post Office Investments & MIS
  6. Endowment Policies

The post-tax returns of this asset class also hover around inflation. So, this class does not provide growth. However, a comparatively higher interest and tax exemptions on EPFs/PPFs/NSCs could help your money grow.

Equity

If you buy shares of a company, you are purchasing part ownership. Shareholders, thus, have voting rights in annual general meetings.

Ownership also means a share in profits that are distributed as dividends and bonus issues. As the company grows, the value of your shares also grows. Equity generally involves:

  1. Stocks
  2. Mutual Funds
  3. Equity Mutual Funds (Section 80C deductions are available on Equity Linked Saving Scheme)
  4. ETFs and Index Funds
  5. Angel / Startup Funding

Equity investments are highly liquid as they are openly traded on stock exchanges. This makes them risky and volatile in the short term. However, you could reduce your risk by diversifying your portfolio.

Commodities

Goods that can be consumed or used by us in different forms are grouped under commodities. Commodities are tradeable but they portray different characteristics.

They can be perishable, durable, or precious. Different commodities carry different risks, depending on durability and value. This asset class includes:

  1. Wheat, rice
  2. Bronze, copper, steel, aluminum
  3. Gold, silver, platinum
  4. Coffee, sugar, cotton
  5. Commodity ETFs

Commodities except gold, silver, and platinum are generally traded. Commodity ETFs track the market prices of the underlying commodity. You can thus gain from the fluctuation in market prices.

Real Estate

You can invest in real estate by purchasing a physical property. This asset class is the least liquid.

Many factors affect the rise in property rates, including government policies, development projects, residential facilities, etc. Real estate includes:

  1. Residential property like apartments and bungalows
  2. Commercial property
  3. Land

You can purchase real estate for your use, to earn rental income, as an investment, or for commercial usage.

Historically, real estate prices have shown differential returns. The cities that have developed and urbanised have seen a higher rise in real estate rates when compared to others.

If you invest your money after learning about each asset class in detail, you could manage to minimise your losses and magnify your returns.

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