What are asset classes?

An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are thus made up of instruments that often behave similarly to one another in the marketplace. 

Examples of asset classes include equities, fixed income, commodities and real estate.

Highest historical run

Historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. On paper, stocks have delivered the highest returns but bonds and real estates have also proved to be a good investment. It’s generally a good idea to diversify your investments into multiple asset classes to minimize risks and maximize returns. Commodities were really popular asset classes before the financial crisis but now equities take the trophy. 

Why is choosing the right asset class important?

Portfolio diversification is the process in which you allocate some portion of the portfolio to different asset classes (such as gold, equity, etc.). It is important to help earn better risk-adjusted returns at the overall portfolio level and reduce the risk and volatility of the investments. Suppose you have 30 Lakhs invested in stocks and 15 lakhs invested in Gold. Due to a global economic crisis, there is a fall in value of bonds and so you suffer a loss of 3 lakhs. Gold is generally associated with being stable and even increasing in value over time so it compounds upto 16 lakhs. The 3 lakh loss is compensated by the 1 lakh profit which is significantly more important than suffering a loss of 4 lakhs. 

Leave a Reply

Your email address will not be published.