Diversify your portfolio? Discover the advantages and disadvantages of the different asset classes

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There can be various criteria to rank the asset classes, for example based on location or markets, based on consumption, etc., the asset classes are then ranked.

Based on an investor’s financial goals and objectives, experts suggest investing in different asset classes. That said, there are risks and rewards associated with each asset class. When choosing an asset class, investors must decide whether a single or a combination of asset classes is the right bet to meet their needs.

There may be different criteria for classifying asset classes. For example, based on location or markets, based on consumption, etc., asset classes are then ranked. Having said that, some of the popular asset classes in India include bank FDs, equity mutual funds, debt mutual funds, and gold.

Advantages and disadvantages of the different asset classes:

Fixed deposit (FD)
Assured returns and easy investment opportunities make FDs among the most popular investment instruments in India. FDs are considered more comfortable and reliable instruments than other options.

Also, other investment options like investing in stocks require additional setup like demat account etc. Fixed deposit does not require any such account and is easy due to easy access to banks. The FD also offer premature withdrawal in an emergency, with a small amount charged as a penalty. However, FD is both tax inefficient and inflationary, therefore, it fails to maintain wealth.

Equity
By investing directly in stocks of various companies, investors can either invest directly in stocks or through diversified portfolios of mutual funds. Experts suggest that an investor should keep in mind that investing in stocks is for the long term. In the short term, market risks directly affect stock returns, so investors are advised not to place their cash in the stock market.

When invested for a long time, it mitigates the impact of market risks and generates a higher return. It is therefore advisable to invest in equities over a long period.

Generally, the return on equities, over the long term, is much higher than that of all other asset classes. Experts say that in the long run, stocks have the ability to beat inflation and therefore should be used for long-term wealth creation.

Gold
Industry experts say gold is viewed as a hedging instrument rather than an instrument of wealth creation, as people opt for gold during turmoil in the markets or the economy.

Having gold in an investor’s investment portfolio will help them combat the impact of inflation and economic uncertainties. It also helps to manage the risks of investing in stocks and debt. Financial experts suggest that investors should have around 20 percent gold in their portfolios.

Note that, on the downside, investments in gold are not tax-efficient. In addition, gold also offers a limited opportunity to generate long-term returns.

Debts
Investing in debt securities can be done either by investing directly in bonds or other debt securities issued by corporations, government and the RBI, or through diversified portfolios of debt mutual funds. . Debt funds are less volatile than stocks, although investments in debt securities also involve market risk.

However, investments made in fixed-maturity debt securities are relatively stable and returns are quite predictable, unlike investments in stocks. That said, the scope of returns is also limited as the investments are made in fixed-maturity instruments.

These investments are used for periodic returns, due to their predictable returns. In addition, when calculating the long-term capital gain at the time of redemption, many debt instruments and debt FCPs are authorized to benefit from indexation. Therefore, this tax-advantaged asset class helps investors preserve their wealth and beat inflation.

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