Asset classes are groups of investments with similar characteristics. Below are the seven most common asset classes:
Fixed income: These are safe investments like fixed deposits and PPF in India. They offer steady returns (7%-8%) but provide limited growth as they don’t usually beat inflation.
Equity: It represents stocks that provide partial company ownership. They offer higher long-term returns (16%-18%) but come with higher risk.
Real estate: These are investments in properties and are influenced by factors like city planning and government schemes. They offer growth but with unpredictability.
Commodities: This category includes tradable goods like gold and oil. They are often preferred because they offer potential high returns during price fluctuations.
Cash and cash equivalents: These represent liquid investments like savings accounts and liquid mutual funds. They offer low returns (around 4%) but provide high liquidity.
Derivatives: These are financial contracts that derive value from other underlying assets (stocks, bonds, etc.). Commonly, derivatives are used for hedging or speculation purposes. Their value is tied to underlying asset movements.
Alternative investments: This asset class represents non-traditional assets like hedge funds, bitcoins, and artworks. It is mostly pursued by high-net-worth individuals. Such investments generate high returns but come with high risk and complexity.