All I have talked about on this website is how we can save, invest and improve our financial status & knowledge. In a few articles, I have described where and how money can be invested. What I have left up until now is defining Asset Classes up close. We all know what assets and liabilities are. Most of us might also know the examples involved. But in my opinion, very few out there know about the inside out of these terms.
In this article, I’ll explain the terms Asset and Liability. I’ll also explain about different asset classes and the returns they have generated over the years. So sit tight, grab your coffee and grasp every word of this article.
Table of Contents :-
Assets and Liabilities
To put it simply, anything that earns you money or whose value grows over time is called an asset. The exact opposite is the case with liability. A liability is whose monetary value depreciates over time. Let us understand the terms better by taking an example for each –
Car – Is a liability. You buy a car at price X, and as time passes, its value starts depreciating. You can never sell a car at a price equal to or more than you paid for it. Plus, to drive that car, you need fuel, and you need to process fixed maintenance charges too. You pay for the car; you pay to drive it. Clearly a liability!
Real Estate – Say you bought a property at price Y. Fast forward 5-10 years, you get double the amount you invested. Real estate has given a return of about 10-23% over the years. Clearly an asset!
You must have known this already. In case you didn’t know, well, it doesn’t matter. You know now. Real estate, stocks, bonds, cryptocurrency, gold, all these are counted in the assets section. These commodities put money into your pocket. You must’ve also heard the saying –
“Time is the greatest Asset.”
It is as true as the sun rising in the east. How you manage and spend your time, how & when you take actions affect your future. The sooner you start investing and the longer you stay invested, determine your final corpus.
What are Asset Classes?
Now that we’ve talked about assets, it’s time to dive into asset classes. Asset Classes are nothing but a collection or grouping of certain similar assets. The contents of an asset class follow the same rules and exhibit the same characteristic. For example – Gadgets. Gadgets are not assets particularly, just an example!
Gadgets can be considered as an asset class. Mobile phones, tablets, laptops, and PCs are assets. Each gadget has a certain function and property, but the gist is the same – Technology. Get the idea?
Different asset classes operate in a similar way, but none can replace any other. Two asset classes can have the same motive, function, and property, but none of them can take the place of another. Things might be getting a bit confusing here. Let us dive straight into different asset classes, and we’ll be good!
Types of Asset Classes
There are numerous things that can be referred to as assets. All these assets are well defined within different asset classes. Let us get on with some of the most popular and standard asset classes.
Fixed Income Asset Class –
This can be termed as one of the most popular asset classes in India. The same is the case with other countries and continents. However, the percent might be less. It is also the oldest form of the asset class. This class includes all the assets that give you a sort of fixed income every month or over the year. For example – government bonds, schemes, corporate debt security funds, etc. An investment into these sorts of guarantees returns and can be availed on a recurring basis.
Real Estate Asset Class –
As the name clearly suggests! This asset class contains all the real estate investments that you can hold. Say plots, apartments, rental units, buildings, commercial spaces, etc. A good real estate investment and you can enjoy returns up to 100% in 5-10 years.
In India, real estate investment is by far the most popular and trusted investment one could make. However, a bad move can wipe out all your investments, and you can go broke. Real estates are a high-risk investment, believe me, or not.
Equity Asset Classes
This is where our favorite stock market enters. A company allocates a part of its ownership through equity and stocks. Stock investing has gained immense popularity since the COVID outbreak. The percentage of Demat accounts surged since March 2021 is unimaginable!
The equity and stocks are further categorized based on sector, risks, capitalization, etc. There is a lot to learn and apply when it comes to investing in equity asset classes. I recommend you start investing in equity as soon as possible. If you are a complete beginner, start out by investing in Index Funds.
Cash Asset Class –
If you wish to inculcate investments for the short term only, cash asset classes are the best for you. Assets under this category are highly liquid. The liquidity of an asset means how easily one can buy or sell it in exchange for money.
The cash asset class is highly accessible as, unlike equity and real estate, you don’t have to wait days and months to get assets/money in hand.
Why do you need to know about Asset Classes?
Can you do something about a task you have no knowledge of? No. The same goes for asset classes and investments. Unless you know all asset types, in which class they are considered, and how much can you earn through it, you can’t invest properly.
All of us aspire to amass wealth through investments. But in order to know where to invest and what asset is good for you, you’ll need to know about asset classes. The more you know, the more you grow. The better you invest, the more you amass.
As I have already talked about on this website, Diversification is very important. A good amount of diversified portfolios reduces the risk factor. Hence, knowing about asset classes gives you the power to diversify your portfolio according to your needs.
You may have different requirements. Say liquidity, low/high-risk appetite, or anything. Here it becomes very important for you to know about asset classes. Consider the situation where you don’t know anything. You go and invest a huge corpus in the equity asset class. Now you realize that your risk appetite is low, and you need liquidity. How’d you feel?
Hence, it’s important to know about asset classes.