An asset class is a specific category of investment such as stocks, bonds, real estate or cash. Investing is a trade-off between risk and expected return. Depending on the risk appetite of an individual, he can choose to invest in a combination of asset classes that would optimize his returns. Some of the most common asset classes are as follows:
Cash assets comprise of near currency assets viz., T-Bills, commercial paper, money market instruments, and short-term government bonds that are liquid (i.e. they can be easily converted to hard currency at short notice).
Equity (also known as a stock or share) is a portion of the ownership of a company. A share in a corporation gives the owner of the stock a stake in the company and its profits. As the individual buys more stocks, he increases his ownership stake in the company. Stocks are generally more risky; along with providing an opportunity to earn significant returns, they also carry the risk of part or complete loss of the invested amount.
A bond is a formal contract that obligates the borrower to repay the borrowed money with interest to the issuer of the bond. In India, the corporate bond market mainly consists of issuers of three different categories – government-owned financial institutions (FIs), government-owned public sector undertakings (PSUs) and private corporate entities.
Recently, investing in real estate has become increasingly popular making it a common investment vehicle. Although the real estate market has plenty of opportunities for making significant amounts of money, real estate as an asset class is not readily accessible to the retail investor. However, with the introduction of real estate mutual funds (REMF), investors across various sections of the society will be able to take advantage of the growth in this sector.
Of all precious metals, gold is the most popular as an investment. It is renowned as a hedge against inflation and has limited downside risk.
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