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Investment Asset Classes Explained

fixed income investment

A handy guide to understanding some common types of asset classes that you will encounter in investing.

1. Money market

money market fund

Considered to be similar to holding cash. Money market instruments have maturities that range between  one day and one year, although these are most often three months or less.

Examples of money market instruments:

Cash savings, fixed deposits, money market funds, treasury bills

Characteristics

Pros:

  • High-liquidity

  • Generally safe

Cons:

  • Low interest

  • Not a good hedge against inflation

2. Fixed income

A fixed income fund is one that invests primarily in bonds or other debt securities. It generally pays a return on a fixed schedule to investors, typically in the form of fixed interest or dividends. The amount of the payments can vary. Usually preferred as a tool to generate regular income and to preserve capital.

Examples of fixed income instruments: 

Corporate bonds, retails bonds, bond funds

Characteristics

Pros:

  • Low to medium-risk

  • Provides regular payouts as a form of income stream

Cons:

  • Not always a good hedge against inflation if returns are less than inflation rate

  • Prices of a fund decline with rising interest rates

3. Equities

Equity represents the amount of money that would be returned to a company’s shareholders if all its assets were liquidated, and all of the company’s debt is paid off. We can think of equity as a form of ownership in any asset after subtracting all debts associated with that asset—when you buy a company’s stock it represents some form of ownership in that company.

Examples of equities: 

Stocks, equity funds, index funds

Characteristics

Pros:

  • Potentially higher returns on your investment

Cons:

  • Volatile

  • Higher risk of losing the capital invested

4. Commodities

A commodity is a basic raw material or primary agricultural product that can be bought and sold. For investors, commodities can be an important way to diversify their portfolio beyond traditional securities, because the prices of commodities tend to move in opposition to stocks.

Examples of commodities: 

Commodities that are traded are typically sorted into four broad categories: metal, energy, livestock and meat, and agricultural. Gold. Silver, grains, beef, oil, and natural gas are some examples.

Characteristics

Pros:

  • Low or negative correlation with returns to equities

Cons:

  • Riskier as prices are impacted by uncertainties, and hence are hard to predict

5. Real estate

Investing in real estate involves purchasing  the properties. This could also be in the form of Real estate investment trusts (REITs). REITs provide investors an entry into non-residential investments, such as malls or office buildings, that are generally not accessible to individual investors. REITs are highly liquid because they are exchange-traded, as compared to a property which requires more time and costs to sell.

Examples of real estate instruments: 

Residential, commercial and industrial properties, REITs

Characteristics

Pros:

  • Good inflation hedge

  • Provides regular income stream

Cons:

  • Illiquid (Properties)

  • High upfront capital required (Properties)

  • Highly sensitive to interest rate fluctuations (REITs)

 

Summing it all up…

For each of these investment classes, there are various instruments that investors can use to participate. An investor could invest in equities by buying the actual shares, or through buying a derivative such as Contract for Difference (CFDs). Each instrument under different asset classes comes with different risks and should be considered in context.

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