When we invest our money, it is important to know where it goes, to which asset class. Investment instruments are classified into groups, called asset classes, based on the characteristics they exhibit in a marketplace. Investment tools put together in one group are subjected to the same laws and regulations. Experts put different investment tools in different asset classes to help investors diversify their portfolios quickly. According to them, equities (stocks), fixed-income and debt (bonds), gold, and real estate are the most popular asset classes.
If your portfolio is spread across these four classes, your investment is considered balanced, which is good as it reduces risk and maximises the possibility of returns.
Buying shares of a company means purchasing ownership in that company, which will be equivalent to the value of those shares collectively. As part-owner of that company, you become entitled to a part of the company’s profits, usually paid to investors in the form of dividends. Some companies may choose to use the dividends to reinvest to propel their growth. To earn good returns, balance the risks, and book profits timely.
Fixed-income and debt (bonds)
When you buy bonds from an institution, you’re basically lending them money. In return for this loan, the institution promises to pay you interest in the form of periodic payments. These payments are paid to bondholders throughout the life of the bond. The principal amount is returned to you at the end of the term. To make most of your investment in bonds, keep in mind that their prices are inversely correlated to interest rates.
Gold and other precious metals
Gold and other precious metals belong to the commodities asset class but given its strategic value and the sudden surge that it registers, it is usually considered in standalone terms. Last year, the yellow metal was deemed the best performing asset as the pandemic hit major economies. This year, the prices have remained low as investors gained the confidence to put their money in other instruments, backed by vaccine rollout and positive sentiment.
Real estate or tangible assets
Tangible assets are those which you can physically see or touch. These are grouped into their own asset class. Real estate is the most common tangible asset that people own, but livestock also falls into this category. These assets are believed to withstand periods of volatility.
All these asset classes are known to deliver good returns in the long run.