Asset Classes

A little about asset classes. My thoughts. As said in my last blog, I intend to take up stocks and particularly “Value Investing” next. Since stocks make an important category of the asset class, it would be pertinent to talk a little about asset classes which are basically investment avenues and hence this piece.

Some of you may be aware of what the subject term means. For the uninitiated in the world of financial jargon, it simply means types of investments or assets that one can have. I hope all of us have a pretty good idea of the basic definition of assets (we have these) and liabilities (We have to give these). Still, to make it clear, an asset is something of value that we own. An asset class is a set of different types of assets sharing similar characteristics. There are different classes of assets available for one to choose from to invest and with Investment proportion to each asset class depending on the expectation of returns, associated risk appetite and age. 
These are described below.
There are different asset classes available for investment like Equity markets, Bonds, Debt instruments, Real estate, Gold and precious metals, Paintings/Antics and latest being bitcoin and other cryptocurrencies. Let us not forget CASH as an asset as the old saying goes “Cash is King”. 
A) Fixed income assets: Bonds,  PPF, Postal deposit schemes, FDs, Non-convertible debentures (NCDs), Debt (mutual) Funds etc fall in this category (Listed in order of increasing risk). These are fairly secure and offer more or less fixed return depending on current interest rates. The first three can be considered absolutely secure. Company deposits and NCDs are slightly riskier. Generally, the returns on all these investments are moderately low but the capital is protected. One should prefer these for retirement-related investments.
B) Stocks are real wealth creators in the long term and hence should constitute at least 50% of total investment if one is investing in early or middle age. BSE Sensex has returned an average 15% over the last 25 years. Select stocks have been multi-baggers. However, Sensex constituting stocks keep changing and returns in particular years varied from 82% plus to 52% minus. So there will be periods of great upheaval and one has to be watchful. Over the long term, however, the gains are decent with minimized risk. For our age, we should only invest excess funds in stocks where possible loss of capital shall not affect daily living and remaining liabilities.
C) Real estate has seen a boom in India in the last twenty years. However, it may not continue to appreciate at the same rate as it is fuelled mostly by black money. The laws are getting tighter too. The rate of return (by rent) on investment in real estate is not more than 2.5% per annum and the investment is highly illiquid. People have their liking about investment in real estate but I’m of the opinion that one should own only one house to live. Actually, it makes good financial sense not to own even one house and continue to live in a rented house. This is evident from the 2.5% maximum rate of return by rental income on investment in property quoted above. One can invest the capital to better investment avenues to get incremental returns. Off course, changing homes in old age could be tough, so have one house. Another point to note is that the capital appreciation on property looks tremendous in terms of current absolute value compared to acquisition value. But if you actually calculate the rate of compounded return per year, it’s usually average. I will strongly recommend to always check your return rates on investments through actual calculation. Make use of website https://www.calculator.net/investment-calculator.htmlFor example a 35 lacs investment 20 years before looks terrific at a current value of 3.4 crores but it boils down to a compounded annual return of a moderately good 12%. Even this 12% appreciation may have occurred only in big growing cities like Mumbai, Pune and Bangalore etc. There may be some rental income but there are related expenses and possible depreciation as well. Not bad investment really but pales in comparison to what reliance mutual fund would have given for 20 years. A staggering 10.4 crores at 18.5% compounded annual return.
D) Gold & Precious metals: Gold is insurance against inflation and in bad times for economy and stock markets. Gold is still considered real money which has withstood the test of time for time immemorial. Though it doesn’t really earn any returns on investment (except for the recent issue of RBI gold bonds offering 2.5% per annum (taxable) and capital appreciation(taxable if en-cashed within eight years), it should ideally form at least 10% of an investment portfolio.
E) Paintings & Antic value assets: These are for really very wealthy people so I won’t get into details. In any case, very wealthy people won’t be reading this.  ☺️☺️
E) Cryptocurrencies: These are the latest rage due to insane appreciations but most of the Governments do not back and accept these as cash. Also, very few people understand the technology and therefore it is far too risky to get into these as serious investment options. Some people may like to invest $ 100 or so just to satisfy their gambling instincts.

Here we come to the end of our discussion about asset classes. 

Your comments, queries & suggestions are most welcome.