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Asset Class & Asset Allocation - NSDL

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23 views14 pages

Asset Class & Asset Allocation - NSDL

Uploaded by

meghabisht1234mb
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Why Do We Invest?

1. Investment is necessary to support your financial needs when you do not


earn money.

2. By investing a portion of your income you allow money to grow and work
for you.

3. There any multiples avenues where one can invest money.

4. 3 parameters to assess suitability of any investment avenue are –


i. Return potential
ii. Safety
iii. Liquidity

5. Various avenues where money can be invested, are broadly classified into
some groups, known as ‘Asset Class’.
What is meant by Asset Class?
1. An Asset Class is a group of different financial assets or
instruments which have some common ground in terms
of safety, returns and liquidity.
2. Typically various investment avenues under one asset
class respond similarly to market conditions.
3. Historically, asset classes have shown significantly
different performance in different market conditions.
4. Therefore, it pays to allocate different amounts to
different asset classes.
5. This process of allocating or investing some amount to
different financial assets or financial instruments is
called ‘Asset Allocation’.
Type Of Asset Classes

Cash and Cash


Fixed Income Real Estate Gold Equity
Equivalent
How to Decide Asset Allocation?
3 Classical Questions

1. Which are the appropriate Asset Classes for one investor?

2. How much money one should invest in one particular Asset Class?

3. How much money one should invest in one particular financial asset or instrument
(within one Asset Class)?

 There are no standard answers for above questions.

 Asset Mix varies from person to person.

 Even for one person, Asset Mix is not constant. It varies over time.
Factors Affecting Asset Allocation

Time Horizon

Risk Tolerance

Risk versus Reward

Tax saving

In real life, there are many assets which can not be fit into a
single Asset Class, meaning they are Hybrid Assets.
A Basic Approach for Asset Class Selection

Its not the case that all salaried persons should have similar Asset Mix. Even same
salaried person will need to reconfigure his / her portfolio with advancing age,
changes in family composition, etc.
Importance of Portfolio Diversification

1. An Investment Portfolio means


combination of various financial assets
belonging to different asset classes.

2. A well diversified portfolio reduce the


overall risk and ensure optimal returns.

3. It ensures that portfolio performance is


not affected by poor performance of
any single asset class.
Some Important Asset Classes – Fixed Income

1. Typically have fixed return


attached.

2. Time horizon is pre-defined


generally.

3. Examples –
i. Bank Deposits – Fixed and
Recurring - (FDs / RDs)
ii. Government securities
iii. Corporate debentures or
bonds
Some Important Asset Classes – Equity

1. Equity offers typically high but


uncertain returns.

2. Examples -
i. Equity shares
ii. (Equity) Mutual funds
Some Important Asset Classes – Gold

1. It is the oldest form of holding assets.

2. It is popular across the world. Even


central banks do hold some portion of
their reserves in gold.

3. Various forms of investment in gold –


i. Physical gold – coins, bars,
jewellery
ii. Digital gold
iii. Gold mutual fund and Gold ETF
iv. Sovereign Gold Bond
Some Important Asset Classes – Cash

1. Cash earns typically the lowest


returns, yet essential component of
portfolio.

2. A thumb rule – keep 3 to 6 times of


your monthly expenses in Cash or
Cash like assets as Emergency Funds.

3. Examples –
i. Hard cash or bank balance
ii. Foreign exchange
iii. Flexible fixed deposits
iv. Liquid mutual funds
Characteristics of Different Financial Assets
Financial Asset or Instrument Returns Liquidity Safety

Government Bonds, Treasury Bills, National Saving Certificates, Fixed Deposits


Low Medium High
with Scheduled Banks, Saving Bank and Recurring Deposits

Deposit schemes of PSUs / Infrastructure Companies / Blue chip Companies, Low


Medium Medium
ULIPs to High

Mutual Funds, Corporate Bonds, Corporate Fixed Deposits, Preference Shares, Low to
Medium Medium
Commercial paper, Certificate of Deposits Medium

Low Low
Direct Investment in Equity High
to Medium to Medium

Collective Investment Schemes, Derivatives, Currency Swaps, Credit Default Medium to


High Low
Swaps (CDS), Collateralized Debt Obligation (CDO) High
Remember

1. Always remember your financial goals and investment timeframe.

2. Review your financial goals periodically, atleast once in 5 years.

3. Risk and Return profile of various assets are not constant.

4. Consider taking help from a registered and qualified Investment Advisor.


“Investing money is the process of
committing resources in a strategic way to
accomplish a specific objective.”

Alan Gotthardt

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