Investing Asset Classes
Investing Series I Education Hub
Hopefully you know what investing is, it is basically a long-term investment in different asset classes. Now we will talk about what are possible investment asset classes where you can invest your money.
Types of Assets
Cash: A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. On the downside, the interest earned from cash socked away in a savings account seldom beats inflation.
Fixed deposits (FDs) are less liquid instruments, but they typically provide higher interest rates than those in savings accounts. However, the money put into a FD is locked up for a period of time (months to years), and there are potentially early withdrawal penalties involved.
Bond: A bond is a debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency, where the borrower will issue a fixed interest rate to the lender in exchange for using their capital.
Bond rates are essentially determined by interest rates. Due to this, they are heavily traded during periods of quantitative easing or when the central bank raises interest rates.
Mutual Funds: A mutual fund is a type of investment where more than one investor pools their money together to purchase securities.
Even a relatively small investment provides exposure to as many as 100 different stocks contained within a given fund’s portfolio. So, they are well diversified most of the time. Mutual funds are sometimes designed to mimic underlying indexes such as Nifty or S&P.
Exchange-traded funds (ETFs) are similar to mutual funds, but they trade throughout the day, on a stock exchange. In this way, they mirror the buy-and-sell behavior of stocks. This also means that their value can change drastically during the course of a trading day.
ETFs can track an underlying index such as the Nifty 50 or S&P 500 or any other basket of stocks with which the ETF issuer wants to underline a specific ETF.
Stocks or Shares are the most popular investment assets. Stocks let investors participate in a company’s success via increases in the stock’s price and through dividends. Shareholders have a claim on the company’s assets in the event of liquidation (that is, the company going bankrupt) but do not own the assets.
Among all of the asset classes, cash being the most stable and alternative investments often being the most volatile. Sticking with index funds or exchange-traded funds (ETFs) that mirror the market is often the best path for a new investor.
Stocks tend to have higher yields than bonds, but also greater risks. Many investment specialists recommend diversifying one’s portfolio.