Different Asset classes - I

Assets that tend to go up or down in a similar way under a given market condition are grouped together under an umbrella known as Asset classes. Different asset classes may have opposite correlation or no correlation at all for given market condition.

Importance of Assets class:

Let's say we have an individual who is about to retire within a year. He is totally invested in a particular asset class. The next morning there was news, which made his investment value to fall 35% like we have COVID-19 Lockdown. Within a year's time, it might be difficult for the assets to breakeven(to reach invested value).

Let's say he has invested in equal proportions in asset classes that are opposite in correlation with each other.

 So, when the one asset class goes down, other asset class will make up for the loss. This is known as portfolio management.

Types of Asset classes:

The asset classes are broadly divided into 5 categories. They are

1. Equities:

Equities refer to ownership in business. When you hold equity, you will hold the ownership position in an organisation. Shares are the basic building block of equities. The ownership of an individual in a corporation depends on number of shares that individual holds to the total number of shares issued by that organisation.

This is a pretty large topic to be discussed in this post, please find detailed information about equities here.

Advantages:

This asset class outperforms all the other asset classes over long term basis.

These are highly liquid. Whenever you want to sell, you can always find a buyer when markets are open.

Disadvantages:

Return depends on the market conditions. One negative trump tweet can make your invested value fall by 10%.

These are highly volatile.

There are no guaranteed returns.

Bonds:

Whenever government or a corporation is in need of money, they issue a paper with a promise of repaying with predetermined interest amount. The paper that is issued is called as bond.

Bonds issued by government is known as sovereign bond and is known to be most secure.

Bonds issued by organisations are called corporate bonds.

Advantages:

Predetermined interest rate is known (long term bonds may change depending on the interest rates set by RBI's monetary policy).

Almost zero volatility if individuals hold short term bonds.

Disadvantages:

They are locked in until redeemed.

Historically stocks have given better returns compared to bonds.

Commodities:

The raw material used by industries to produce goods and services are known as commodities. These include metals such as zinc, copper including precious metals like gold and silver. Even blackgram, rice, wheat come under this category.

Advantages:

Used as hedge against inflation.

Governed by international price movements hence less prone to less manipulation.

Disadvantages:

There is a risk of physical delivery.

Only trades are done. Can't able to invest in perishable commodities like agriculture and meat for long.

The other asset classes will be discussed here