Asset Classes

Certain mutual funds provide investors with various kinds of shares, called "classes." Each class invests in the same pool of securities and has identical investment goals and strategies.
EXPLORE FUNDS
Asset Classes
EXPLORE FUNDS
4 mins
14-May-2024

Mutual funds are a popular investment option in India, with a wide range of asset classes to choose from. In this article, we will explore the concept of asset classes and how they relate to mutual funds. We will also discuss the different types of mutual funds based on asset class, alternative asset classes, and additional factors in classifying assets.

What is an asset class?

An asset class is a group of securities that have similar characteristics and behave similarly in the market. Each asset class has its own risk and return characteristics, which makes it important for investors to understand the differences between them.

Types of asset classes

Listed below are a few types of asset classes:

  • Income-focused investments: A beloved choice among Indian investors, the fixed-income asset class stands as one of the oldest investment forms. It encompasses various instruments like corporate and government bonds, debt securities, and money market tools, aiming to provide regular interest payments until maturity.
  • Ownership-based investments: Equity, or stocks, represents ownership shares in companies. Over the past decade, equity has surged in popularity. Equity funds branch into small-cap, mid-cap, large-cap, large and mid-cap, multi-cap, dividend yield, thematic, contra, value, focused, sectoral funds, and Equity-linked Savings Schemes (ELSS).
  • Property investments: Real estate focuses on tangible assets like apartments, plots, industrial sites, villas, and commercial buildings. The physical presence of real estate sets it apart from securities existing solely in virtual or dematerialised forms.
  • Liquid assets: Cash and cash equivalents suit short-term investments, known for their liquidity. Investments like money market instruments, commercial papers, and treasury bills mature within a year, ensuring easy accessibility to invested funds.

Types of mutual funds based on asset class

Mutual funds can be classified based on the asset class they invest in. Here are some of the most common types of mutual funds based on asset class:

  1. Equity funds: These funds invest primarily in stocks . They invest the money pooled in from various investors from diverse backgrounds into shares/ stocks of different companies. The gains and losses associated with these funds depend solely on how the invested shares perform (price-hikes or price-drops) in the stock market. Equity funds aims to generate significant returns over a period but also carry higher risks.Explore more about, What are equity funds.
  2. Debt funds: These funds invest primarily in fixed-income securities such as bonds, securities, and treasury bills. They invest in various fixed income instruments such as fixed maturity plans, gilt funds, liquid funds, short-term plans, long-term bonds, and monthly income plans, among others. Since the investments come with a fixed interest rate and maturity date, debt funds can be a great option for passive investors looking for regular income (interest and capital appreciation) with medium risks.Read more about, What is a debt fund.
  3. Money market funds: These funds are a type of debt mutual funds, in these the money markets or capital markets by issuing money market securities like bonds, T-bills, dated securities, and certificates of deposits. The fund manager invests your money and disburses regular dividends in return. Opting for a short-term plan (not more than 13 months) can lower the risk of investment considerably on such funds.Read more about, What are money market mutual funds.
  4. Hybrid funds: As the name suggests, hybrid funds (balanced funds) are an optimum mix of bonds and stocks, thereby bridging the gap between equity funds and debt funds.

Read more: Different types of mutual funds.

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Alternative asset classes

Apart from traditional asset classes like equities and fixed income securities, there are alternative asset classes that investors can consider:

  1. Real estate: This asset class focuses on apartments, plots, industrial areas, villas, commercial buildings, and so on. Real estate investments can provide regular rental income as well as capital appreciation over time.
  2. Commodities: Commodities include raw materials like gold, silver, and oil, which can be traded on commodity exchanges. This is a good option for investors who want to diversify their portfolio.

Additional factors in classifying assets

Apart from traditional asset classes like equities and fixed income securities, there are additional factors that can be used to classify assets:

  1. Market capitalisation: Market capitalization refers to the total value of all outstanding shares of a company’s stock. Companies with large market capitalizations are known as large-cap companies while those with small market capitalizations are known as small-cap companies.
  2. Geography: Companies can be classified based on their location or where they do business such as emerging markets or developed markets.
  3. Sector: Sector refers to the overall industry that a company operates in, such as technology or healthcare.

By understanding the different types of mutual funds based on asset class and their associated properties, investors can make informed decisions about their investments.

Investment strategies as per different asset classes

Investment approaches are influenced by factors like growth, value, income, etc. Here are several strategies used for asset allocation:

  1. Strategic asset allocation: Investors or fund managers distribute investments evenly across asset classes based on expected returns and considering investment duration and risk tolerance. Diversification is key to manage risks and enhance returns.
  2. Dynamic asset allocation: This strategy adjusts asset combinations as markets fluctuate or economic conditions change. Assets declining in value are sold, while those rising are bought to maintain portfolio returns.
  3. Integrated asset allocation: Considers an individual's economic outlook and risk tolerance to establish asset mixes, tailoring the strategy to the investor's risk appetite.
  4. Insured asset allocation: Establishes a minimum benchmark value for portfolio returns. If returns exceed this base, active management strategies are employed. If returns fall below, investments are shifted to risk-free assets to stabilize the portfolio. Suited for risk-averse investors desiring active management and a safety net for their investments.

Conclusion

Mutual funds offer investors a diverse array of asset classes, each catering to different investment objectives, risk appetites, and time horizons. Whether seeking growth, income, or a balanced approach, there is a mutual fund strategy suited to every investor's needs. By understanding the various asset classes and investment strategies available, investors can make informed decisions to build portfolios aligned with their financial goals. With the potential for growth, the benefits of diversification, and the expertise of fund managers, mutual funds remain a cornerstone of successful investment journeys. Embracing the flexibility and opportunity they offer, investors can navigate the complexities of the financial markets with confidence, empowered to pursue their long-term wealth accumulation goals.

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Frequently asked questions

What are asset classes in SIP?

Systematic Investment Plans (SIPs) is a way of investing in mutual funds which offer a range of asset classes for investors. These asset classes are essentially different types of investments that exhibit similar characteristics.

The primary asset classes in mutual funds include stocks, bonds, commodities, etc. These classes provide investors with choices to diversify their portfolios based on risk tolerance and financial goals.

What are the most popular asset classes in India?

In India, the most popular asset classes include fixed income, equity, real estate, and alternative investments. Fixed income assets like fixed deposits and public provident funds (PPF) are trusted by many.

Equity or stock are shares of ownership issued by companies. Real estate focuses on properties like apartments, plots, and commercial buildings. Alternative investments can range from commodities to derivatives.

Each of these asset classes has unique characteristics and risk-reward profiles. Diversifying your investments across different asset types can help manage risks and maximize returns.

Why are asset classes useful?

Asset classes are crucial for diversifying investment portfolios. They encompass different asset types like equities, fixed income, cash equivalents, real estate, and commodities. Each of these types of asset classes behaves differently in the market. By investing across multiple asset classes, investors can balance their returns and losses. For instance, mutual fund classes allow investors to invest in a mix of asset classes. This diversity minimizes risk as your funds come from multiple sources. Hence, understanding different asset types and the benefits of diversification across various types of asset classes can help achieve financial goals.

How to purchase investments from different asset classes?

To diversify across asset classes, investors can use brokerage platforms or financial instruments like mutual funds and exchange-traded funds (ETFs). These vehicles provide exposure to various asset classes such as stocks, bonds, real estate, and commodities, allowing investors to easily access diverse investment opportunities within a single platform.

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