Investment asset classes explained

When we talk to any investment advisor, terms like "asset class", "asset allocation", "diversification", etc keep cropping up. It is very important for a lay investor to understand these terms to make an informed decision. In this article we will discuss the basics of Asset class.

When we talk to any investment advisor, terms like “asset class”, “asset allocation”, “diversification”, etc keep cropping up. It is very important for a lay investor to understand these terms to make an informed decision. In this article we will discuss the basics of Asset class.

Asset class is defined as a group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed-income (fixed deposits, bonds, NSC, KVP, etc) and cash and cash equivalents (like money market instruments).

In addition to the three main asset classes, some investment professionals also add real estate and commodities (gold, silver, etc), and possibly other types of investments, to the asset class mix.

Whatever the asset class lineup, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment.

Further breakdowns are sometimes made within the asset classes into growth stocks, value stocks, based on market capitalizations (small, medium, large) or various types of fixed income such as government bonds, corporate bonds, small savings, public provident funds, etc, or even relative percentages of core asset classes such as equities, fixed income and cash, found within a mutual fund.

For simplicity, below is a summary of the relative differences between the investment characteristics of the three most popular asset classes i.e.

1. Cash and Fixed Deposits
2. Property
3. Equities and Mutual Funds

Although, Gold is also a popular asset class amongst Indian investors, but we will discuss it in some other article.

Differentiating characteristics of various asset classes

Further, you can also watch the following video from investmentyogi.com that defines basics of asset classes :