A Beginner’s Guide to Investing: ASSET CLASSES

by Anirban Chakroborti

Chances are, you’ve just come into a lot of money and don’t know what to do with it. Or, you probably earn well every month, but want to squirrel it away conservatively. However, every now and then, you hear these people dressed sharp as a knife, say, “Made all my money in the market”.

But that’s just one. There’s always one guy at the party who says how he raked in the big bucks on one day and maybe bought that smart watch you have long eyed. If you are thinking of going that line – pinch yourself hard and run the other way as fast as you can.

While the discussion on money can go on for hours and would require more than just one blog post, here’s a piece of advice for anyone who has to work hard to earn their money and has a day-time job: think of investing, not trading.

Investing is when you decide to buy a certain financial product for a long-time, displaying your confidence in the product with the hope that it performs well in the coming future. However, for anyone stepping into the world of financial products, the one looming problem is a lack of knowledge. It’s like going to buy a car at a dealership where all you know is that you need a car to serve some functions – help with your transport, provide you a comfortable journey. However, the only catch in this analogy is that you step into the showroom without knowing anything else about cars – fuel efficiency, maintenance costs, parts availability, etc. Your only hope during the purchase, your salesperson – and you cannot always trust them to make the decision for you.

This is exactly the situation for any person trying to buy financial products in the country. There are a lot of options to choose from. Many Asset Management Companies (AMCs), many funds, fund managers, exchanges, brokerages. And there are a lot of people with a simple need – to reap returns, without a lot of awareness about the things that lead to it. While hiring a financial planner is always a good step, even choosing the right one is a task, and can get expensive when not starting with a sizeable amount.

While the journey to financial literacy is a long one, learning the basics is a good first step. Figuring out the different asset classes is a good way of understanding the different types of products that are out there in the markets.

 

What are Asset Classes?

Put simply, they are certain group of investments that show similar characteristics and fall under the control of same laws and regulations. Basically, it’s a categorisation of the different types of investment products available to people.

 

Historically, we had 3 main types of asset classes:

1.      Equities, very simply, stocks.

2.      Fixed Income, such as bonds. In India, we might be familiar with the Post-Office Recurring Deposits, or the Bank FDs, which very easily fall under this category.

3.      Cash Equivalents, which are money market instruments such as Treasury Bills or Commercial Paper.

 

In recent times, we have seen a flurry of a fourth category – Alternate Investments, which generally include Real Estate, Commodities, Futures, Cryptocurrencies, Art, etc.

 

A key observation that one can draw from this is the clear difference in characteristics of each of these classes. And while demarcating different types of products would be a good place to start, each of these products react to the market and news differently, and vary in terms of their returns as well. Holding onto any one asset class largely, is again an inadvisable tactic.

As you delve deeper into this world, we shall explore each of the asset classes in depth over the upcoming series.