Asset classes
The most traditional and popular asset classes are cash, equities and bonds but there are a lot of others also. Lately we could see higher interests to alternative types of investments such as art, real estate and collection issues.
The most traditional and popular asset classes are cash, equities and bonds but there are a lot of others also. Lately we could see higher interests to alternative types of investments such as art, real estate and collection issues.
CASH
CASH – are proposed to protect your money and increase their value gradually/ Mostly people use such investments in a form of deposit accounts, which pay interests regularly and are always open for money withdrawal. This is one from the safest money investments type although in a long term inflation could depreciate your money value so it is to invest capital for a short-term.
Advantages:
- low risk, high liquidity;
- fixed interest rate;
- presence of such asset class in your diversified portfolio helps to minimize risks provoked by equity investments.
Risks:
- low incomes in comparison with equity or bond incomes;
- inflation harm for short-term and long-term investments;
- currency movements.
BONDS
BONDS – debt securities which could be state, corporate and municipal types.
State bonds are issued by the government and meant to be the safest as they are guaranteed by the state structure.
Corporate bonds – are issued by companies to enlarge or finance their operations. Traditionally they propose higher income levels than government bonds but also they provide higher risk degree.
Advantages:
- permanent income possibility in case of holding bonds till their maturity date and without default;
- presence in the funds’ portfolio minimize short-term equities volatility;
Risks:
- default may happen;
- movements in interest rates make influence on bonds prices; If interest rates are up, bonds prices go down and vice versa.
EQUITIES
EQUITIES – provide investor’s share in the capital of a company-issuer. In a long-term period shares are the best instrument to increase your capital as they provide much higher incomes tha bonds or deposits although they have a high risk appetite. That’s why one should always remember that incomes that has been earned in past couldn’t guarantee the same indicators in future.
Advantages:
- in a long-term period provide much higher incomes than other asset classes;
- incomes may be earned in a form of dividends payments or capital appreciation.
Risks:
- equity markets naturally provide high volatility, they can sharply go up and just as the same go down;
- the issuer company may become a bankrupt;
- as equity prices may sharply go down you may lose your investment amount even.
COMMODITIES
This asset class includes:
- energy sectors (oil, natural gas);
- metal and precious metals;
- agricultural sector;
- industrial sector;
Incomes from commodities assets in a long-term period may be compared with the incomes from equities.
Advantages:
- lack of proposition and growing demand has helped to increase positions of some commodities, meaning oil and metals;
- may be used as a mean of diversification of portfolio from risks as the commodities market has another direction of development as equity markets and bond markets;
- commodities are more positive for inflation influence;
Risks:
- commodities prices may change quite often so investments should be allocated among different sectors;
- slow economic development may influence in a negative way on commodities prices.
By using this variety of asset classes, investment managers are able to create effective portfolio combinations, make prognosis in their development with the aim to receive incomes and minimize risks.
Diversification between asset classes helps to achieve better risk/income ratio and create balanced investment portfolio to satisfy your investment needs.
