While choosing the asset classes, investors should know the risks and rewards connected with every investment class along with its features to decide if a single or a mix of asset classes is the right bet to meet their requirements.
There can be various criteria to classify asset classes. For instance, as per the location or the markets, assets are categorized as domestic securities, foreign and international investments, emerging markets and developed markets. However, the popular asset classes in India are fixed deposits, equity mutual funds, debt mutual fund, and gold, among others.
Investors diversify into different asset classes to suit their financial goals and objectives. However, while choosing the asset classes, investors should know the risks and rewards connected with every investment class along with its features to decide if a single or a mix of asset classes is the right bet to meet their requirements.
Here are some advantages and disadvantages of different asset classes:
Investments in equities or stocks of companies are subject to market risks as they are done through stock markets. Investors can invest in equity either directly by investing in shares of various companies or through diversified portfolios of mutual funds.
Investing in equities for a long period is advised as to when invested for long term inequities, it fades the impact of market risks and generates a higher return. Usually, the return from equities, in the long run, is much higher than all other asset classes. Experts say equities, in the long run, have the ability to beat inflation and should be used for long-term wealth creation.
However, in short term market risks affects the return from equities directly, hence, investors should not put their liquid funds in Equities.
Fixed Deposit (FD)
Due to easy investment opportunity and assured returns, FDs are very popular instruments in India. People feel FDs are more comfortable and trustworthy instruments as compared to other investment options.
Unlike investing in stocks where an additional facility like a Demat account is needed investing in a fixed deposit does not require any such account and is very easy due to easy access to banks. Also, during an emergency, FDs offer of premature withdrawal with a small amount charged as penalty.
However, Fixed Deposit fails to maintain the wealth as it is both tax and inflation inefficient.
Even though investments in debt instruments also bear market risks, however, they are not as volatile as equities. Similar to investing in equities, investment in debt instruments can be done either by investing directly in bonds or other debt instruments issued by companies, government, and RBI. It can also be done through diversified portfolios of debt mutual funds.
Unlike investments in equity, investments made in fixed-maturity debt instruments, are comparatively stable, and the returns are quite predictable.
With predictable returns, these investments can be used for periodic returns. While calculating the long-term capital gain at the time of redemption, many debt instruments and debt MFs are allowed to take indexation benefit, hence, debt as an asset class helps investors preserve their wealth, and benefits inflation as well as is tax-efficient.
However, the scope of returns is also limited with this investment option as investments are made in fixed-maturity instruments.
People are seen to opt for gold during the turmoil in markets or the economy. Gold is, hence, seen as a hedging instrument, rather than a wealth-creating instrument. Experts suggest investors should have around 20 percent of gold in their portfolios.
Having gold in an individual’s investment portfolio helps them fight the impact of inflation and economic uncertainties in returns. It also helps in managing the risks of investing in equities and debts.
However, in the downside investments in gold is not tax efficient. Experts say this yellow metal also provides limited opportunity to generate long-term returns.