While allocating your investments across asset classes note that it should be in line with your goals and risk appetite. According to experts, as an investor, you should limit your exposure to a specific type of investment within an asset class.
While allocating your investments across asset classes note that it should be in line with your goals and risk appetite. According to experts, as an investor, you should limit your exposure to a specific type of investment within an asset class.Investments are usually made to earn high returns, but high returns come with high risks. Hence, to maximize your returns and minimize the risks, you need to diversify your portfolio. With a diversified investment strategy, you spread the risks of your investments across various asset classes.
There are various criteria to classify asset classes. For instance, according to the markets or location, assets are categorized as domestic securities, emerging markets, and developed markets, international and foreign investments, etc. However, among the popular asset classes in India are bank fixed deposits (FDs), gold, real estate, equity mutual funds, and debt mutual funds. Usually, as an investor, you diversify your portfolio depending on your risk appetite and goals. As an investor, while choosing asset classes, know the risks and rewards connected with every investment class along with its features. Then decide if a single or a mix of asset classes is the right bet to meet your requirements.
Hence, while allocating your investments across asset classes, note that it should be in line with your goals and risk appetite. According to experts, as an investor, you should limit your exposure to a specific type of investment within an asset class.
Here is how the popular asset classes in India work:
Fixed Deposit (FD)
Fixed Deposits are one of the popular instruments in India, due to their easy investment opportunity and assured returns. People usually feel bank FDs are more comfortable and trustworthy instruments.
With FDs, one does not require to create any additional facility and is easily accessible through banks, unlike investing in stocks where an additional facility like a Demat account is needed. Additionally, you can make a premature withdrawal from your FD with a small amount charged as a penalty, during an emergency. Having said that, bank FDs do not beat inflation and also fail to maintain the wealth as they are both tax and inflation-inefficient.
Investments in equities or stocks of companies are done through the stock markets. Hence, they are subject to market risks. As an investor one can invest either directly by investing in the shares of various companies or through a diversified portfolio of mutual funds.
Experts suggest one should invest in equities for a long period, as it fades the impact of market risks and generates a higher return. In the long run, the return from equities is generally much higher than all other asset classes. In the long run, equities have the ability to beat inflation. In the short-term market, on the other hand, risks affect the return from equities directly, hence, do not put your liquid funds in equities.
In times like now, where there is a turmoil in markets and the economy, people are seen to opt for gold as the yellow metal is seen as a hedging instrument, rather than a wealth-creating instrument. According to experts, one should have around 20 per cent of gold in one’s portfolio. Having gold in their portfolio helps investors fight the impact of inflation and economic uncertainties, and also helps in managing the risks of investing in equities and debts.
On the downside, investments in gold are not tax-efficient, and in terms of generating long-term returns, they provide limited opportunity.
Debt investments are not as volatile as equities, even though they also bear market risks. Investment in debt instruments can also be done either by investing directly in bonds or other debt instruments issued by companies, government, and RBI, similar to investing in equities. You can also invest through diversified portfolios of debt mutual funds. Investments made in fixed-maturity debt instruments are comparatively stable, and the returns are quite predictable, unlike investments in equity.
These investments can be used for periodic returns, with predictable returns. Many debt instruments and debt MFs are allowed to take indexation benefit while calculating the long-term capital gain at the time of redemption. Hence, debt as an asset class helps investors preserve their wealth, and is also tax-efficient.