“If you don’t find a way to make money while you sleep, you will work until you die” ~ Warren Buffet
In this week’s #tfpforall we try and understand the very basic concepts of Wealth Management, yesterday we discussed ‘Risk and Return.’ In case you missed it, click here to check it out. Today we try to understand what is Asset Allocation.
As we discussed about risk and returns previously, it was mentioned different asset classes have different risk-return profiles.
Let’s have a look at the different asset classes that are available to you for asset allocation and diversification.
Gold
Gold as an investment option is considered as a safe haven and thus has a low risk-return profile. It tends to provide 8-10% average returns and typically higher during recessions since more and more people prefer buying this asset while the equity markets/ other assets classes underperform. Investing in gold has been made easier with the introduction of Sovereign Gold Bonds and Gold ETFs.
Fixed Income/Debt Markets
This class refers to investing in debt instruments of companies/ government. It provides a fixed source of income at a pre-defined rate of interest called the coupon rate. In simple terms, it is like you are giving a loan to an entity. There is a common myth that bonds are risk-free assets. It is only the Government bonds that are risk-free since they’re backed by the government (as if they need to pay, they can always print money!). All other bonds carry some amount of risk which is compensated by the additional returns.
Equity
The equity market is nothing but a market place where shares of a company are traded. Share as the name suggests is part ownership in the company.
Real estate Investment Trusts (REITs)
This is a relatively new asset class where the trust invests in income-producing real estate asset that provides a fixed income and capital appreciation. In western countries, this is known as Mortgage-Backed Security (MBS) (Does this remind you of 2008 Global Financial Crisis ?)
Mutual Funds (MF)
A mutual fund is a trust that pools money to be invested by a professional fund manager. It invests money according to a common investment objective. This takes into consideration the risk-return and adopts a strategy accordingly where the main goal is to beat the market benchmark. Different types of MFs are available that invest in different sectors or themes in equities and bonds or even a combination of both.
Cryptocurrency
Cryptocurrency as an investment option is still in it’s very nascent stage. This theme is rapidly gaining acceptance and viability because of lower transaction fees and greater transparency. The most spoken about crypto currencies include Bitcoin, Litecoin, Ethereum and Neo. Investing in this instrument has not been legalised by the government of India and many other countries too because of lack of an intermediary.
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