The benefits and drawbacks of various asset classes | Motilal Oswal

Different Asset Classes and their Benefits

An asset class is a category of investment. If you are a beginner in the field of investment, you may be confused as to what to invest in, as there is so much out there. However, through exposure, you probably know about the stock market today, and moreover, know that stocks may just be the most commonly traded assets in current times. You may have also heard of bonds. 

Over the last twenty or so years, typical financial and investment portfolios have grown in length and breadth so that they may include other classes of assets. These classes may be commodities, real estate, cryptocurrencies, and futures. The share market today is not the only place to invest in. More and more investors are viewing the diversification of financial portfolios as a huge advantage to grow wealth. This can withstand volatile markets and works to beat inflation. It may be worth your while to know about the common asset classes and the advantages of each, before you start to look for investment opportunities. 

Equity

Under the asset class that is known as Equity, there are assets like shares and stocks of companies. These are public companies with shares listed on stock exchanges. Therefore, any member of the public can purchase such shares, becoming a shareholder of the company. Online trading takes place in exchanges and it is easy to sell or buy any public company’s stocks online. To invest in stocks and shares investors must first open a Demat account. Equity is an asset class that is popular for the following reasons: 

  • Equity provides numerous types of shares/stocks, like small-cap, large-cap  and mid-cap
  • Generally, equity comprises of assets that are liquid, easily and quickly sold and purchased 
  • Companies that you can invest with equities in belong to a range of sectors, like energy, real estate, finance, consumer goods, utilities, technology, materials, industrials and communications.  
  • Equity generally provides reruns that are high compared to other asset classes. 

Fixed Income Securities 

Fixed-income securities are bonds. These pay investors coupons on fixed schedules. Bonds resemble loans, except that borrowers are governments, or corporations. As a return, investors receive initial investments back. Furthermore, interest is added to this. Generally, bonds don’t provide any stake of ownership in any company. The pros of bonds include the following: 

  • Bonds give a payout of a return which is fixed
  • Bonds are prone to be a lesser volatile asset compared to others like stocks
  • Particular bonds provide a degree of income liquidity and stability

Commodities

Commodities represent intermediate or basic goods which are used primarily in commerce and trade. They are classified into certain sub-categories as under: 

  1. Precious Metals
  2. Energy
  3. Base Metals
  4. Soft Commodities
  5. Agriculture

Unlike stocks in the stock market today, commodities are described as fungible. What this implies is there is little or no difference between any two commodities in the same sub-category even if they are sourced from different producers. The advantages of shares of commodities are:

  • They are highly liquefiable assets
  • They can provide investors with high returns relative to other assets
  • They can safeguard investors against inflation
  • Commodities offer diversification of any portfolio

Some commodities like metals, especially gold, are fungible. You can buy this and store it in physical form. When the asset’s price shoots up, you can sell it for a profit. 

Cryptocurrency

The share market today has some stiff competition from the cryptocurrency markets that have recently taken investors by storm. This comparatively recent asset deals with digital currency. Some cryptocurrencies are used for the actual purchase and sale of products and services, so they are payment tools. The most liquid of all cryptocurrencies is bitcoin. You are able to trade in cryptocurrency in some simple ways. First, you may open a wallet digitally. This will permit investors to use cryptocurrency coins for payment purposes. Second, you are allowed to trade contracts in return for a difference. The perks of investing in crypto are:

  • They help you to diversify a financial portfolio
  • They have moderate liquidity
  • You can trade in cryptocurrency with the use of many methods. 

Futures

Also known as futures contracts, futures offer the obligation and right to buy and sell underlying assets at a designated date and time in the future. Generally, futures contracts are traded on regulated exchanges and online trading of these, like stocks, is possible. The exchange is responsible for reporting all possible transactions to regulatory authorities. The exchange also determines the contract specifications. The contracts that are involved in futures trading track underlying assets that may include commodities, stocks, bonds, forex, cryptocurrencies, etc. Hence, rather than a real asset, this is more of a way to trade underlying assets. The benefits of these are:

  • They represent high liquidity
  • They are regulated
  • Exchanges provide transparent dealings
  • You can have some leverage via a margin account while trading in futures contracts

Real Estate

The most traditional and oldest kinds of assets, within this class, exist in numerous categories. These comprise of retail, commercial, industrial and residential. Generating income from a real estate investment includes various ways, such as renting and capital gains (from the sale of a property). You can either buy a physical property (a tangible asset), or invest in a trust for real estate (a company that is the owner of real estate). The benefits you get from investing in real estate are: 

  • Investors have total control over investments
  • Real estate provides a monthly rental income
  • You can get tax benefits
  • Real estate can be insured
  • This is a liquid investment 

Know Your Asset

Whether your pick to invest in is the stock market today or any other investment, you should always consider your life goals before you invest. What you choose to invest in depends on what you want out of your investment. The best way to start is to enrol with a reputed brokerage and open a demat account. Whatever investable class of assets you finally pick, you have to think of diversification of your portfolio, so you can make the most of your assets and mitigate potential risk. Some assets, like stocks, do well over time, and others may be highly liquid and offer you short-term gains. 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

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