A group of investments that exhibit similar risk and return characteristics, and respond in a similar fashion to economic and market events are grouped together as an asset class. Based on the return and risk attributes, financial assets or investment options can be broadly classified into the following asset classes:
Equity as an asset class represents a growth-oriented asset and we provide best equity tips for the same. The major source of income to the investor is growth in value of the investment over time. Debt as an asset class represents an income-oriented asset. The major source of return from a debt instrument is regular income. Cash and its equivalents are for parking funds for a short period of time and earning a nominal return.
Understand about risk revert0 ratio in share market
However, as investment options have extended beyond capital market products, these basic categories have also expanded to include commodities, real estate and currency. Hence, 24 Carat has a wide array of bullion services, base metal services and commodity tips.
The risk and return features of each asset class are distinctive. Therefore, the performance for each asset class may vary from time to time depending upon the prevalent economic factors. For example, commodities as an asset class perform well during inflationary times. Equity on the other hand, is impacted by inflation and tends to correct down.
Generally held for meeting day to day and emergency requirements.
Cash holds negligible value in terms of returns and hence, there is minimal risk.
- Bonds provide fixed return in the form of coupon/interest income.
- Bonds have the scope for capital appreciation when interest rates fall, but may be subject to interest rate risk when interest rates rise.
Corporate bonds are subject to credit risk of the issuer.
- Government securities are considered to be risk-free as it is believed that a Government will not default on its obligations towards its own citizens.
- Debt securities are subject to inflation risk, interest rate risk, credit risk and re-investment risk, depending upon the type of bonds.
- Risk and return characteristics of bond are relatively lower than equity and hence, suitable for an investor seeking regular income flows with minimal risk.
- A stock represents ownership in a company.
- Empirical study suggests that this asset class provides higher returns if invested for long run.
- Volatility is higher in this asset class than cash and bonds as an asset class.
- Equity investments are subject to market risks and business risks.
- Real estate Involves investment in land or building (commercial as well as residential), or Real Estate Investment Trust (REIT).
- Real estate as an asset class presents a number of management issues including tenancy management, property maintenance, and legal clearances.
- It suffers from liquidity risk and are impacted by economic cycles.
- Physical gold is preferred by Indian families as a secure and stable investment and is also highly liquid.
- Gold also provides as an option of asset class for diversification within a portfolio of assets, being directly/ indirectly correlated with other asset classes.
- Gold is generally used as a hedge against inflation.
- Gold and commodities are susceptible to changes in demand and supply
Other alternative assets
- Investment in art/ collectables is being made for reasons which are personal and emotional, generally deriving pleasure
- Art/ collectables have a very low correlation with other asset classes and hence, have diversification benefits.
- Fine art and other collectables have a very subjective value. Hence, there may be no exact measure for determination of the same.
- This asset class comes with very low level of liquidity and the risks associated with lack of regulation and standardization.
The existence of asset classes with different risk and return features provide investors the choice of selecting asset classes that meet their requirement for returns and risk tolerance. Investors seeking higher return and willing to take the higher risk and types of risk associated with the asset class will look at equity or commodities; while investors seeking lower income and lower risk will consider debt investments.
The investment horizon suitable to an asset class also varies. Investors who expect to hold the investment for very short periods consider cash and equivalents. Bonds are suitable for intermediate holding period while investors need to have a long investment horizon for holding equity and other asset classes with volatile returns. 24 Carat Financial Services examines the palpability of its client and serves him with the exact and most suitable asset class services.