Wealth creation is every ones dream and to achieve it we invest in different asset classes. However, many times our investments do not generate the result as expected. One of the primary reason for this is the wrong choice we make due to lack of awareness on the asset class we have selected. Queries received from so many investors reveals that one class is considered for both long and short term goals. For e.g asset class like equity is not considered by many for their long term goals but a product like bank RD will form the core product.
Each asset class has its own specific advantages and disadvantages that should be taken into consideration while creating an investment portfolio. Since all asset class differ in risk and return characteristics, they impact your financial objectives.
Following are the four major asset class where we invest and a clear understanding of these can make our financial decisions much wiser.
- Equity
It’s an ownership in a business. A share is listed on a stock exchange and traded daily based on demand and supply. Since the price fluctuations is highest in this asset class it is considered to be the riskiest of all. And so it offers the highest return. However, if we go by historical data, the probability of losses in equity markets reduces if invested for more than 10-15 years. The average return this asset class has produced in last 15-20 years is approx 17% CAGR. The same is not true if invested for 5 years or less. On a yearly investment historical data the range of returns can vary from 47% to -150%. Hence this asset class yielding high returns with reduced risk when considered for long term investment.
- Real Estate
Investment in real estate involves buying any physical asset (land, building etc.) and leasing or renting it out. Although it gives you returns higher than fixed interest, the biggest disadvantage is that it has a very prolonged period. There are situations which are not under your control like any bad development in your adjacent area which may affect your property and you may find it difficult to lease or rent yours at the right price. Houses which you have inherited get damaged when you continue them for very long period. There are other cost associated with this asset class like maintenance which affect your earnings. Still with all these disadvantages it has been the preferred choice for investors and is being considered for making quick money.
- Fixed Interest
Fixed interest investment is lending of money (FD, Bonds, Debentures etc.) to others in return of a fixed interest. The fixed interest return varies with the time horizon of the instrument. The capital gets locked for a certain period and funds are unavailable. The biggest misconception regarding this asset class is that it is assured and does not fluctuate. However, there are certain investments which carry certain kind of risk with them and fluctuate heavily. Credit risk, interest rate risk and default risk are risks associated with this asset class.
- Cash
It involves investments on call. This means funds are available as and when required. Savings account, Money market instruments are some of the options which will fall under this category. The biggest advantage for this asset class is liquidity. However, the return are lowest across all asset class which signifies the zero risk associated with it.
Although there are asset class like gold, arts & collectibles etc., above four are primary where every individual is invested in meeting some or other goal. An understanding of these asset classes helps in creating a balanced portfolio where impact of certain risk in one asset class gets nullified by performance of other. This is very important as your financial goals get aligned within these asset classes and a wrong choice can severely impact the desired result.
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