The Indian financial and non-financial asset markets offer various investment avenues for today’s retail investors. To curate a comprehensive and optimised asset portfolio, you need to begin at the basics. This involves getting to know the meaning of asset classes, their significance, and the types of asset classes in India.
In this article, we go over these crucial details.
What does an asset class mean
An asset class is a group of assets that have similar properties and features and behave in a similar manner during different market cycles. They are also subject to common laws, so they are taxed and regulated in the same manner.
The assets in any given class also carry similar risk profiles and have around the same potential to deliver returns as other assets in that category. That said, you can also group assets in any given class into various subclasses based on various nuanced characteristics.
Types of asset classes
Now that you know the meaning of asset classes, let us examine the different categories of assets available to investors. The broad asset classes in India include the following:
- Bonds and fixed-income instruments
Bonds and fixed-income assets are debt securities that offer guaranteed income or returns on the investment made. These instruments are not market-linked assets, so their returns are not subject to fluctuation based on the prevailing market sentiment. The low degree of risk makes instruments in this asset class in India suitable for conservative investors who prefer to minimise the market risk in their portfolios. That said, this asset class may be prone to other downsides like credit risk and interest rate risk. - Equity stocks and securities
Equity stocks and equity-oriented instruments belong to a different asset class in India. They include equity stocks of companies and equity-oriented mutual funds. These assets are market-linked investments, so they do not offer any guaranteed returns. Investors can earn from this asset class in two ways — through the dividends paid by the companies and through capital appreciation if the price of the asset increases with time. However, due to the high-risk nature of these assets, they are best suited for aggressive investors who can take on more risks. - Cash and cash equivalents
This asset class in India includes cash in hand and other securities that can easily be converted to cash. This makes them highly liquid assets because they can be redeemed for cash at any time. They also have a very short-term outlook, often with maturities of up to just 1 year. Since the chance of losing your money in these assets is very low, they are low-risk investments suitable for conservative investors. However, on the flip side, they do not offer the potential for high returns either. - Commodities and currencies
Commodities and currencies are other financial assets available in India. Commodities are agricultural and non-agricultural goods that can be traded in the market. Currencies are essentially currency pairs that are traded in the forex market. Together, this asset class in India is also available to traders who are interested in capitalising on the price fluctuations of the commodities or currency pairs involved. These markets are more volatile than the stock market and therefore carry slightly higher risk. - Derivatives
Derivatives are speculative financial instruments that derive their value from an underlying asset like stocks, commodities, or currencies. Futures and options are examples of derivatives that belong to this asset class in India. Since the prices of these instruments are derived from the price of the underlying assets, they are significantly volatile and carry high levels of risk. Additionally, they are better suited for trading (where you capitalise on short-term price fluctuations) rather than investing (where you aim to leverage long-term capital appreciation). - Real estate and other tangible assets
Real estate and other tangible assets like gold, art, and other collectibles are non-financial assets that are typically best suited for long-term investing. The aim of investing in this asset class in India is to benefit from the potential appreciation in the asset’s value over several years. Since these assets are tangible, they are classified as real assets. A crossover between the financial and non-financial markets has now made it possible to invest in the real estate market without owning a physical property — via Real Estate Investment Trusts (REITs).
The significance of asset classes for investors
Knowing the asset classes in India can be a stepping stone to making smart decisions about which assets to include in your investment portfolio. Each asset class has a different risk-reward potential. Furthermore, you also have different subclasses within each asset class — where the risk-reward proposition may vary slightly from the other subclasses within the same category.
For instance, within the equity asset class, you have different subclasses based on the market capitalisation of the companies — namely small-cap, mid-cap, and large-cap stocks. Small-cap stocks are generally riskier than large-cap stocks. Similarly, there are different types of equity mutual funds, with index funds being among the least risky and contra funds being among the riskier variants.
So, being aware of the different asset classes in India helps you diversify your portfolio in such a way that the overall risk of your investments is within your risk tolerance limits. Additionally, it also helps you select assets that can generate the returns you need to fulfil your financial goals. Without adequate knowledge of the asset classes in India, you may choose assets that are riskier than you intend, resulting in potential losses. You may also not be able to generate adequate returns to meet your financial milestones as planned.
Conclusion
Understanding the meaning of asset classes and their significance is crucial at every stage of your investment journey. Whether you are just putting together your first investment portfolio, reviewing it or rebalancing it, knowledge of the asset classes in India is necessary.
Now that you know what the different asset classes are and how they align with your risk preferences and goals, you can make an informed decision about which category of assets to focus on. That said, the financial markets in India are dynamic and evolving, so keep an eye out for regulations that affect the asset classes you have invested in.
