Asset Class, Asset Classes
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An asset class is a set of securities that show similar characteristics and behavior in the market. The group of securities in an asset class is also governed by the same rules and regulations.
Asset classes can be broadly classified into two types, namely defensive and growth oriented. The first category comprises assets that generate safe and consistent returns. The assets in the defensive asset class are suitable for investors who are not willing to take high risks. Growth oriented asset classes match the profile of long-term investors who do not fear risks. Their aim is to generate higher returns.
Types of Asset Classes
Asset classes are of the following types:
Shares: A share, also called equity, is a stake or a unit of ownership that an investor can buy in a company. Usually, the returns yielded by shares are much higher than that of other asset classes. Investment in shares is quite flexible as they can be traded easily. However, the investment in shares is risky due to price fluctuations. Investing in shares is suitable for long-term investors who are willing to take risks.
Property: Investing in immovable property in the form of a residential or commercial building or land is suitable for long term investors. Investing can take place by purchasing the property directly or by investing in a property trust fund. Property investment is not usually flexible as it requires sufficient time to buy or sell property.
Cash: This type of asset class includes everyday bank transactions and short-term investments in the money market. Cash investments reduce the overall risk in an investment portfolio as investors can easily access their capital. However, the rate of return in cash investments is the lowest. There is very limited scope for capital growth.
Fixed interest assets: These assets yield fixed rates of return until the expiry of the maturity period. Examples are bonds and certificate of deposits (CDs). The level of risk associated with fixed interest assets is low. So, the rate of return of these assets is usually lower than that of shares and real estate. An added benefit is that fixed interest investments can be converted to cash whenever required. This asset class is usually preferred by those who have low risk appetite.
