Asset Classes

An asset class is a bunch of securities that are similar in feature and also behave in a similar manner in the market. There are different asset classes that enable investors to create a well balanced portfolio.

They can be classified as follows:



Fixed income instruments are debt instruments issued by government bodies, banks, financial institutions, etc. Investors purchase a fixed income security in lieu of a payoff after a specified period of time i.e., its maturity. Investors receive their face value on maturity, as well as periodic interest payments. It is essentially akin to a loan made to these institutions. Fixed income instruments are relatively low on risk and generally offer a predictable and modest income flow; they are preferred for short and medium term investments. Fixed income securities include vehicles like fixed deposits, government bonds and certificate of deposits, as well as non-tradable securities like bank deposits.



Money market instruments are characterized by their extremely short term period, high liquidity and relative safety. They are generally utilized as a short term means for lending and borrowing. Commercial papers and treasury bills are among the common money market securities. Their term could be for as short as a day!



Companies offer shares of their stocks for sale, in order to raise start-up capital or to accelerate company growth. In other words, you own a part of the company and have a right to benefit from its earnings. It is like being a part-owner of a business, gaining from its profits and without physical labour! Equity investors are essentially 'owners' and have a right to gain future profits. Returns from these shares depend on external factors like market conditions, political scenario, etc. and also internal factors like the company's performance, change in management structure, etc. Stocks or equities, as an investment vehicle may be risky as the stock market can be highly volatile. Gains can be enormous, so can be the losses. Equity is best for long-term investing as gains and losses get averaged out due to market conditions. This asset class is known to give the highest rate of return over time and also giving investors the benefit of liquidity.

Equity based investments are essential to achieve major investment objectives as they offer the potential for growth and generally outrun inflation, providing investors with much-needed implicit return. However, dealing solely with equity can be highly volatile and more risky. Investing in mutual funds offers the most convenient way to participate in the growth of equity, while reducing / minimizing the risks associated with this asset class. Read the FAQs section to understand the advantages of investing through Mutual Funds.



Of late, this asset class is gaining the attention of investors very fast, owing to the continuous and sustained rise of the real estate value (at least in India). Investments made in real estate including land / property (built / developing) as an investment vehicle fall into this category. Typically this would fall under physical investments since you would own a tangible property for the money that you have put in. The last few years have been very effective for investments in this asset class. However, one needs to understand that investments in this asset class could prove to be very illiquid, which means you may not be able to use the money for anything else till you actually sell the property, which generally takes longer than selling a stock in the market!



This is another mode of investing in a physical vehicle. Commodities include oil, metals (gold, copper, etc.), minerals, etc. Typically these are traded instruments and most investors use this to hedge rising costs of such commodities.