What are Asset Classes: Different Types of Asset Classes in Mutual Funds

Discover the diverse world of mutual fund asset classes with Bajaj Finserv. Explore the meaning, types, benefits, and the crucial aspects of diversification, risk, and returns associated with each asset class.
What are Asset Classes
4 mins
05 December 2023

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 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.
  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.
  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.
  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.

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.

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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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