Get to know the three major asset classes

In the last fortnight, we have discussed about how one should take an investment decision and build a portfolio to reap profits consistently. Considering that gold prices are falling globally and RBI is forced to cut the interest rates, the investor has to fix the investment mix, after taking into account the risk profile of each of the asset class.

After fixing the investment road map and future needs of the investor, one has to make an appropriate investment decision. In fact, one should understand that investment is not generating profits alone, but one need to meet the future financial obligations such as children education, marriage, parents and self medical needs, etc.

It means that one should decide on the investment product, which will get matured at a determined time period without any losses but with some gains. For which, one needs to decide on a product-mix that will be handy whenever the need arises.

Historically, the financial advisors suggest three major asset classes – stocks, bonds and cash. Let us try to understand each class of asset and the risk and reward involved in the investment.

Cash

When it come to cash, one can keep cash reserve in the house, but security will be a problem. But one can keep the cash in saving bank account of a commercial bank, which may accrue a small amount of interest and this is highly liquid asset. This mode is suggested for day-to-day activity. The banks will also issue short-period deposits, that is, three or six month time-frame.

Bonds

The next asset class is bond. It is a financial instrument showing that the issuer is obliged to pay the holder of the certificate, the interest (the coupon) and/or to repay the principal at a date of maturity. Under these instruments, the investor loans money to an entity (either corporate or government) for a defined period of time at a variable or fixed interest rate.

The bonds are usually issued by companies, municipalities, states and sovereign governments to raise money to fund a variety of projects and activities. Here, the owners of bonds are called debt holders, or creditors, of the issuer.

Stock

The third class of asset is stocks also known as equity or shares. In simple words, the stock is a share in the ownership of the company. It represents a claim on the company’s assets and earnings. An individual can buy or acquire a share or shares in a company either through public issue (directly from company) or through stock market.

Investment in this class of asset is a little risky and cumbersome option and it requires little more understanding about the investment, which attaches risk profile that one may even incur losses, if the investment decision turns out to be a faulty one.

By:KVVV Charya

We will discuss about investment in shares in the next article