Investing in Different Asset Classes
An investment is an asset or item acquired with the goal of generating income or appreciation. Let us look at various Asset Classes for Investments.
Best Investment Options in India
The most fundamental decision of investing is the allocation of your assets: How much should you own in stocks? How much should you own in bonds? How much should you own in cash reserve?-Jack Bogle an American investor and the founder of The Vanguard Group
Asset Classes for Investment
Spreading out your investments across a variety of assets is a sensible way to lower the risks involved. For this, it is important that one should know different types of asset classes to invest your savings and grow wealth for achieving your financial goals.
Least Risky & steady returns
Fixed income is an investment approach focused on preservation of capital and income. Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payouts until its maturity. At maturity, investors are repaid the principal amount they had invested.
Debt or fixed income product are:
Direct Fixed Income: Bank Fixed Deposit, Bank Recurring Deposit, Pradhan Mantri Vaya Vandana Yojana (LIC), RBI Taxable & Tax free Bonds, Fixed Deposit with Company & Private parties, Bonds & Debentures issues by Government, PSUs and large Companies, Infrastructure Bonds issued by PSUs, Tax Savings Fixed Deposits (5 year)
Post office Saving Schemes: PPF, NSC, Post Office Time Deposit, Recurring Deposit, Monthly Income Scheme, Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme, Kisan Vikas Patra
Debt Mutual Funds:
· MF-Debt-Long Term- Corporate Bond Funds, PSU Fund, Income funds, G-Sec Funds or Gilt Funds (Government Securities), Floating Rate Fund
· MF-Debt-Short Term: Short-Term Bond Funds (with many variants), Liquid funds (with many variants), Money Market Fund
· Fixed Maturity Plans (Debt oriented)
Govt. monitored schemes: National Pension Scheme, Pension and Annuity schemes from Insurance Companies, EPF (Employee Provident Fund)
High returns high risk
When you invest in equities (also known as stocks), you get to buy shares of a company i.e ownership in the company in proportion to your investments. You also receive small dividend but larger Capital appreciation in line with performance of Company, sector & country.
Ø Direct Equity Investment (long term, preferably in Blue Chip stocks), Equity Linked Savings Scheme (ELSS), Fixed Maturity Plans (Equity), Trading and Short term investing in Stocks, , Portfolio Management Schemes (PMS), Positional Trade (short term) investment in stock market based on events
Ø MF-Equity: Index Funds, Specific Sector Fund, Large Cap Equity Funds, Small & Midcap Equity Fund and variants, Monthly Income Schemes
Ø IPOs, Future & Options in Equity Markets
Equity investments do not generate fixed returns and are therefore considered risky. However, it has the potential to yield relatively higher returns in the long run based on the performance of company, sector and economy. Stocks have high liquidity and allow you the flexibility to convert these easily into cash. Investors with relatively high-risk profile may consider investing in stocks either directly or through mutual funds. Investors having a long term horizon may invest in equities to create wealth for achieving long term goals like retirement.
Precious Metals (Commodity)
Gold & Silver
There are various ways you can invest in commodities (precious metals. Traditional method is by buying physical metals such as gold & silver but there are other products such as ETF, Government Schemes etc. Those with short to medium term horizon can invest in commodities through a commodity market where you can bet on a price hike or fall of all commodities not just gold & silver but even oil, agriculture commodities, metals etc.
The home where you stay should not be treated as Investment.
The real estate sector is one of the most globally recognized sectors. Real estate sector comprises 4 sub sectors - housing, retail, hospitality (Airbnb type), and commercial. The growth of this sector is well complemented by the growth of the real economy, levels of employment, rise of earning leading to demand of urban and semi-urban accommodations. Real estate investment or buying a piece of land/flat/building and selling it at a higher price later has been a traditional form of investment. Most people believe that real estate investment yielded higher returns than any other asset class until the collapse of the real estate market in India after 2008.
Real Estate- Residential (Housing)
As our country is going through an economic transition characterised by demand for better housing facilities, there is a widening gap between the demand for houses and its availability. Both in the urban and semi-urban areas, there is lack of proper housing facilities. Thus there exists inherent demand for residential houses, particularly small houses. One noticeable trend is that young millennials (Generation Y) is looking at staying in small studio apartment, closer to work place, instead of old practice of buying homes and hence look at investing in such property. Rental yields are low and hence this investment should be from own funds and avoid borrowed funds as EMI will be much higher than Rental yield. Sub-segment is Residential houses, Airbnb Type, Co-Share, Farm Houses, time Share etc.
Commercial Real Estate
Commercial real estate is used in commerce and is leased to tenants to conduct business and you earn rental yields. Commercial real estate includes retailers of all kinds, office space, hotels, malls, restaurants, convenience stores, warehouse, godowns etc. Anew trend is “shared space” preferred by young millennials (Startup entrepreneurs) and they want cheap space without Cabins and expensive furnishings. Rental yields are higher than residential property but still lower than EMI and hence major investment (30%) should be from own funds so that you balance rental yield & EMI.
Rise of Bitcoin as Investment product
The price of Bitcoin has skyrocketed in recent months This dramatic increase has understandably raised interest from investors across the globe.
Many clients are asking whether they should invest in Bitcoin and other cryptocurrencies.
We should also be cognizant of the real risk of losing one’s entire investment because price swing & volatility is huge as one can make fortune or we can lose most of the investment. Investors in cryptocurrencies must therefore limit the size of their investments to an amount they can afford to lose. We also suggest thinking about an exit strategy.
Who is buying?
Anecdotal evidence suggests institutional investors are buying more than in 2017 suggesting the growing acceptance of cryptocurrencies by mainstream asset managers
Is it a bubble?
To assess whether Bitcoin is in a bubble or not, we find it useful first to acknowledge the challenges around determining its intrinsic value. The key reason why we find it challenging to come up with a valuation model is simply that Bitcoin and other cryptocurrencies don’t yet have future cash flows that we can discount.
Exotic investment options for HNIs
Alternative investments are catching up, though they need high risk appetite. It is little wonder that investors, especially high net worth individuals (HNIs), are seeking alternative investments. An alternative asset class is something beyond the traditional ones (stocks and bonds) and includes Structured Products such as private equity (PE), investing in unlisted firms and start-ups, and real estate funds. AIFs are privately-pooled investment funds which collect funds from investors, whether Indian or foreign, for investing with a defined investment policy for the benefit of the investors. As a consequence of high & exotic earning potential, asset managers in India have been able to attract investments from top quality investors like sovereign wealth funds, pension funds, university endowment funds etc. into these AIFs in India.