The Asset Classes Showdown
Welcome to the ultimate showdown: "The Barbie v/s Oppenheimer of Asset Classes!"
Buckle up as we dive into a whimsical world where Ken and Barbie tackle stocks and bonds, while Oppenheimer, with his pocket protector, dukes it out with the atomic bombshells.
Get ready for a financial face-off like never before!
As an investor, you have various channels to park your money. Cash, FDs, Real Estate, Stocks, Angel Investment and much more!
Now no matter where you stand on the Barbie v/s Oppenheimer debate, we'd all agree then when it comes to asset classes, we all want our money to grow in the best way possible.
This week, we have it right here for you, all the different kinds of asset classes that exist and what’s the best option for you.
So let’s get right into it!
What is an Asset Class?
Asset classes can be defined as investment securities that exhibit similar characteristics such as risk, returns and response to market fluctuations. There can be numerous criteria to classify asset classes. You may classify them based on purpose, i.e. whether it is a consumption asset like oil and natural gas or whether it is an investment asset like stocks and bonds. You may also categorise them based on location or the markets like domestic securities, foreign or international investments, or emerging markets and developed markets.
However, for now, let us dive into the popular asset classes and explore their distinct characteristics and unique selling propositions. Broadly speaking, we can classify around 5 asset classes- cash, fixed income, equity, real estate and commodities. Here, startup investing has been grouped under equity, but for the purpose of this article, we assume it to be separate.
Cash (Liquid assets)
Also known as Market Instruments, cash is not confined to currency. All of us earn in cash. We keep the money in savings accounts. We use it for day to day transactions. This is an asset class in which we focus more on capital protection than appreciation of money. Hence we are fine with a 2-3 percent appreciation on our money, as long as the initial amount remains safe. A little more risk-adjusted people move this money into debt and liquid funds in order to squeeze out an extra few percent. The primary advantage of cash and it’s equivalents is its liquidity, i.e, it is easily accessible but when it comes to returns, idle money is no good!
Fixed Income (Recurring/ FDs)
These are the most popular asset classes, at least for Indians. Almost every single Indian person would have an FD in his name. Kids get their FDs even before they are born, Just Kidding! The fixed income asset class is one of the most trusted and oldest forms of investments. These are considered to be the next safest investments apart from cash. Currently, banks offer a little below 6 percent on these FDs. These schemes have zero risk attached to them, yes but this only offers security and not money-growth.
The most primary real estate investment that most people own is their homes. Homes are a great investment- you are living in them while their value appreciates. Apart from this, real estate investments include plots, apartments, industrial areas etc. After the launch of Pradhan Mantri Awas Yojana, i.e, house for all scheme, millennials have rediscovered their love of the land! Not just in urban areas but in semi urban and rural areas as well.
The property market is unpredictable and a bit chaotic as well. The value of these real estate investments is very largely subject to the place where they are. A 2 BHK in Mumbai is way more expensive than a 2 BHK in Bareilly. The average return on investment from Real Estate in the last decade has been 11.6 percent.
Equity asset class has gained a lot of popularity in recent times. It means that you buy into a business, you buy shares of a firm, you have a percentage ownership of the firm and so on. The only hitch is the risk that comes along with it.
More developed companies have a larger chunk of their population investing in equity. Equity investing is still low in India with less than 10 percent of the population doing so. However they are one of the greatest tools for capital appreciation. You do not need to invest in multibagger stocks, you can just invest in Index funds and end up making a lot of money. Since its inception in November 1996, the NIFTY 50 index has delivered an annualized return of 12.2%.
Commodities can be anything from goods to properties or products that serve an end purpose i.e. they can be traded for various purposes.
Gold, silver, bronze, food crops, petroleum, etc. all come under this asset class. Here we will talk about the most commonly invested one- Gold. Be it jewellery or just chunks of it- people have a fascination with this shiny yellow bling and are ready to buy it at a moment’s notice. If you choose to buy it, it’s a great investment on your part. It’s a hedge against investment. It has a given a return of 4 percent over last ten years
Angel Investment is like the trip everyone plans but is always too scared to actually go!
We have our doubts, millions of thoughts racing! It’s risky, it's not feasible but the moment you reach there, Voila! You are glad you did it.
Welcome to Angel Investments! They are highly illiquid and risky at the same time but come with exceptionally huge returns. (Read about returns here!)
Early-stage investing goes above and beyond just reaping profits. As an investor, one tends to look not just for wealth generation but also a healthy mix of growth and value in the venture. Diversification must be the go-to strategy to not only minimize the risk that is associated with investing but also to build a robust portfolio. Early-stage investing helps investors do just that and approaching it as an asset class, paves the way for a stronger and more resilient startup ecosystem.
An average investor has had access to most asset classes except startups. That is what we’re changing with 1stcheque. If you want to create wealth that outlives you, the best way to invest in startups you believe in.
That’s what we help you do at 1st cheque. Happy investing!