An asset class is a set of securities that exhibit similar attributes and experience comparable market volatility. Similar legalities almost always bind securities of one asset class. To help investors swiftly diversify their portfolios, experts use a variety of investment methods in a variety of asset classes.
Types of Asset classes
Asset classes are broad categories of investments that have similar characteristics and behave similarly in the market. Some common asset classes include:
- Equities (stocks): Equities are publicly traded firms’ ownership shares. On stock exchanges like the NYSE or NASDAQ, they are traded. A rise in the share price or a dividend payment could result in financial gain from investing in equities. Market capitalization is a common way to divide the equity asset class into small-cap, mid-cap, and large-cap stocks.
- Bonds/fixed income products: The fixed-income securities pay the owner a coupon on a predetermined timetable. Similar to loans, but with the borrower being a government or business, are bonds. You get your initial money back plus interest in exchange. In most cases, bonds don’t provide you with a share of the company.
- Real estate: Real estate investments are physical property used for investment purposes, including commercial and residential properties. Such assets are also seen as more “real” because of their tangible nature. In that respect, they vary from assets like derivatives in that regard, which only exist as financial instruments.
- Commodities: These includes raw materials such as precious metals, oil, and agricultural products.
- Cash and cash equivalents: These are low-risk investments that include money market funds and short-term bonds.
Each asset class has its own unique risks and returns, and they often perform differently in varying market conditions. Diversifying investments across different asset classes can help manage risk and increase potential returns in a portfolio.
Other Different Asset Classes
- Forex, futures and other derivatives: Futures contracts, spot and forward foreign exchange, options, and a wide range of financial derivatives are all included in this category. Financial instruments called derivatives are those based on or generated from an underlying asset. One derivative of stocks is, for instance, stock options.
- Bond investments: Bonds Investments with a fixed rate of return, such as debt instruments that pay interest, are known as fixed-income investments. Compared to investing in equities or other asset types, such investments are considered less hazardous.
Investment Strategies as per different Asset classes
Investment strategies depend on several variables, including growth, value, revenue, etc. Here are a few of the various strategies used to determine asset allocation as per alternative asset classes:
- Strategic asset allocation
According to this, a fund manager or an individual investor will invest in an equivalent range of assets based on the estimated rates of return for each asset class. Additionally taken into consideration are the investment timeframe and risk tolerance. The goal of strategic asset allocation is to maximise returns while reducing risks.
- Dynamic Asset Allocation
As the markets fluctuate or the economy grows or weakens, this strategy periodically modifies the mix of assets a person has invested in. To maintain the portfolio’s overall returns, the fund manager or individual periodically sells assets that are dropping in value and purchases assets that are increasing in value.
- Integrated Asset Allocation
This method considers an individual’s risk tolerance and economic expectations when determining an asset mix. The integrated asset allocation strategy, contrary to most others, considers the investor’s risk.
Key takeaways from asset classes
An asset class is a collection of investments with comparable traits that are governed by the same laws and rules. Asset classes are frequently used to diversify an investor’s portfolio to increase returns.
Investors usually strive for a well-diversified portfolio to reduce the dependence of investment returns on a single asset or class. The five most popular asset classes are equities, fixed-income securities, cash, real estate, and marketable commodities.
Watch the YouTube video by Franklin Templeton India above to understand each of these asset classes in details and how investors can track investments and make decisions regarding future investments or financial purchases by learning how investment groupings fit into asset classes.
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