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Asset Class is a often used word in finance, especially investment & portfolio management. We also used the term many times in our articles. In this article a take a academic look at the various asset classes.

Why know about different asset classes?
Knowledge and understanding about asset classes is a very basic for any person thinks of self as an investor. Though it is not required that one be expert with every asset class, the bare minimum understanding of the nature of main asset classes, the risk profile, returns potential and the way of investing into such asset classes is a humble expectation. In brief, we can put the following reasons for knowing about asset classes:

• Increased choices for informed decision making
• Better investment management through asset allocation & diversification
• Identifying emerging opportunities & risks for investing
• Being rational, unbiased and confident in investment decisions

How do asset classes differ?
Each asset class is different and there are many points of difference against other asset classes. These differences ultimately impact the investment objectives and performance. The asset classes may differ upon the following things...

• Nature and characteristics
• Correlation with other asset classes
• Risk and Returns potential / trade-off
• Ideal investment horizon
• Behaviour w.r.t. markets, interest rates, economic environment, etc.
• Rules, regulations and taxation

Definition and Types of asset classes:
An 'Asset Class' can be defined as a group of securities or investments that display similar characteristics or behave in similar fashion in markets or economic variables and are subject to similar rules & regulations.

There are broadly three basic asset classes considered by most investment experts: (i) Equity securities (ii) Fixed Income or Debt securities and (iii) Cash equivalents. In addition to this, (iv) Real Estate and (v) Commodities are also considered by many as important asset classes given their characteristics and penetration among investors.

The asset classes can be further broken down through ways, but such segregations are generally mixed together whenever we talk of asset classes at a broader level. For example, Equity can be further broken down as large-cap, mid-cap & small-cap but for the purpose of asset class discussions, we categories them all into equities, even though their risk-return behaviour may slightly differ from each other. Breakups can be effectively used for determining diversification within an asset class. But irrespective of any asset class line-up, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment.

Equity:
Our readers must be very familiar with Equity asset class by now. Most would also know that over long term equity as an asset class has outperformed other asset classes in India as well as in more developed economies. Equity basically enables efficient movement of funds from people having excess to businesses that need it to fund growth and business operations. The businesses in turn provide employment, goods & services to public and tax revenues to government and try to make the most productive use of the capital. Equity is a risky asset class and investments should be made for long term. The returns from such investments are in form of capital gains by price appreciation and/or dividend payments by companies.

In India, the equities are largely held directly through stock exchange or indirectly through mutual fund equity schemes. Exposure to equity can also be made through Exchange Traded Funds (ETFs) and Portfolio Management Schemes (PMS) and indirectly through pension schemes / plans that invest in equities. Insurance products, especially Unit Linked Plans (ULIPs) is an another route well known route. Equity can also be held in form of stakes or Private Equity in businesses. This option, however, is limited super HNI and corporate investors.

Debt:
Debt is an another asset class which your would be very familiar with. Some of the popular avenues of debt investments are through Fixed Deposits of banks & corporates and bonds issued by governments, RBI and the likes. Small Saving schemes and pension plans by government is an another major avenue of investing. Mutual funds schemes are lately becoming popular with retail investors too. The mutual funds offer a wide variety of products to suit every need and risk profile of the customer. It is a relatively less risky asset class and returns are generally in form of interest payments and/or capital gains due to impact of interest rates changes over time.

Commodities:
Commodities may be treated as a distinct asset class since their nature and behaviour differs from the other asset classes. Indians have been traditional investors in 'gold' as a commodity. Other commodities are now finding a favour with investors, albeit slowly. Precious metals like Gold & silver remain the biggest avenue for investment and awareness & exposure to other commodities is very low. The impressive performance of these metals over past few years have made them as asset class hard to be ignored by investors.

The commodity prices tend to follow the cyclical pattern of underlying commodities which is why it is important to understand the demand-supply factors. Needless to say, this is not an asset class for the less informed or the faint hearted, especially for agro-commodities & base metals. Investment is generally for short to medium term and the idea is to profit from price movements or hedge against actual exposure. As an asset class, commodities have been observed to have low correlation with the other asset classes and hence offer excellent potential for portfolio diversification. Investments into Gold specially has also become more convenient & practical for investors with the launch of Gold ETFs and mutual fund schemes.

Real Estate:
Real estate is the original idea of creating assets before the other asset classes become popular among investors. Real estate, especially residential / commercial units, unlike other asset classes, except gold, gives the owners a sense of emotional satisfaction and confidence. Holding physical property has also its own share of social acknowledgment of your financial standing. Land is also treated more than an asset in the largely agrarian economy of India.

From an investor's perspective, the investment in physical real estate has its own share of challenges w.r.t. clear titles, transparency, transaction costs, etc. Emergence of new avenues for investments has, to some extend, made it feasible to get exposure to this asset class with less risks. The returns in this asset class is in form of rental/ lease payments and price appreciation. Real estate are the least liquid of all the asset classes and investment horizon is generally long-term to very long term in nature.

Cash:
As an asset class, cash and cash equivalents is unlike any other asset class. The purpose of holding cash is either for transaction / payment reason or as a precaution for any eventuality or as a buffer for taking advantage of opportunities in other asset classes/ products. Cash is the least productive of all asset classes and delivers little or no returns and over time looses out its real value as well. Cash equivalent holdings are dictated by convenience, comfort and cash habits of people. As an investor, one should try to minimise cash equivalent holdings to an optimum level that strictly meets your needs. Mutual fund liquid funds is considered as the ideal avenue for putting aside money for short durations, giving advantages of superior post-tax returns, high liquidity, very low costs & convenience.

Other asset classes:
Apart of the above major asset classes discussed, there are also some more asset classes considered by few investment experts. You may come across asset classes like currency, derivatives and collectibles. Currency, as an asset class is distinct in nature and it derives its existence because of the exchange rate fluctuations between countries. Currency is something of great interest to governments, banks, multinational corporates having business incomes arising in different countries, and even to individuals where source of income and consumption are in separate countries. Derivatives is an asset class that 'derives' its value from the actual underlying asset class. It is more of an hedging and trading tool and fraught with very high risks, something which is suited only for the experts. Collectibles is an emerging asset class where investments are made in art, antiques & other collectibles. This asset class is now finding more favour with HNI investors who are looking for some diversification & spice in their portfolio.

Using Asset Classes:
Understanding of the asset classes leads us to the question - Whats' next?. The usage of different asset classes are basically two fold. First, the understanding is useful for purpose of diversification to optimise risk-return trade-off. This is because different asset classes perform differently in different markets and also differently from each other. Diversification only works when you combine assets that have opposite or low correlation with each other. The second idea is to decide and follow the 'asset allocation' strategy. The asset allocation strategy has been cited by investment managers & experts as the biggest deciding factor for long term wealth creation. Financial advisors have propagated asset allocation strategies of tactical, dynamic and strategic in nature to their investors keeping in mind their risk profile.

In brief:
As markets grow and become mature, there would increasingly be arrivals of new asset classes or product options in existing asset classes. As of today, there already exists a wide variety of asset classes and product options within them, something which wasn't available a decade back. The increasing choices of asset classes and financial products brings complexity, confusion & challenges to any investor. An informed and wise investor would always try and understand & appreciating the nature and nuances of different asset classes. The awareness and comfort level can then be used for designing portfolios based on age old principles of asset allocation and diversification.

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It's that time of the year when most companies will be treating their employees with their annual bonus for their year long hard work. Some of you might have already got the big credit in your accounts, while others might be in the “guesswork” stage, trying to figure out the bonus amount and hoping your boss does not count the number of uninformed leaves you took, or the number of times you came in late.

So what are you going to do with this bonus?

Buy a Phone, throw a Party, buy Clothes, go for a Vacation, or are you going to do something prudent?

The worst you can do is squander away your bonus, the reward for a whole year of slogging is ruined. The company has paid to you, now it's your turn to pay to yourself. So, what should you ideally do? How do you bonus put your bonus to good use?

So the following passage will guide you about managing your bonus effectively so that you maintain a balance between gratifying your desires as well as contributing to your future.

Spend Prudently: We at times end up blowing our hard earned bonus on stuff which we might not have otherwise purchased/needed. Buying an I phone X worth Rs 1 Lac, while you bought a new One Plus 5 six months back, just because you got your bonus, doesn't make much sense. The bonus temporarily increases the size of our pocket, but you must remember that it is your hard earned money, buy something that you really need and afford. Spend your bonus wisely.

Reconsider Investing in Gold: Many people buy gold jewelery/coins from their bonus, as an investment for their future. But the fact is, buying a gold chain may not be a very good investment. Firstly, because the return stats of gold over the past few years aren't very promising, and the future prospects are also not clear. High making charges further accelerate the cost of the jewelry. And lastly, you will most likely never sell it in times of need, because of the emotional value attached. Hence, you must be careful about how much gold/gold jewelery you want to buy. If you are looking to invest, look for better options having a greater return potential and are easy to liquidate.

Don't let it be in your Saving Account: Bonus is a big thing, it is ideal that you give a good thought for deciding its outlay. Till the time you decide the outlay, you can park the money in a liquid fund or an arbitrage fund until you find peace with an investment option. The twin benefit of not lying in your saving account is: it won't vanish with your routine expenses, plus you'll get a better rate of return.

Consider Loan Repayment: Because you normally don't have such huge cash at your disposal, it's a good opportunity to lighten your shoulders by offloading your loans. Normally, when you pay your EMI's, a significant portion of the installment goes towards interest repayment and the remaining towards principal. However, if you make an early repayment, it will be a part of Principal repayment, thus reducing your interest burden over the long term.

> Create/Add to an emergency fund: Your Emergency Fund needs to be reviewed and revised from time to time to incorporate your increased income and elevated lifestyle. So, your annual bonus also offers a good chance to upgrade your Emergency Fund.

> Invest for your goals: A great option that you can consider for your bonus disbursement is invest your bonus for your goals and make your bonus work for your future betterment. Fix a meeting with your Financial Advisor and review your financial plan and allocate your bonus to different investment products in accordance with your financial plan.

To conclude, your bonus is the reward bestowed upon you for your year long hard work. Use it in a way that you appreciate your decision later. You can explore any or a blend of the above or any other option that you may deem fit. Also, do not forget to celebrate the arrival of the bonus, go for a dinner with your family or friends, or plan for a weekend getaway, rejuvenate yourself, because another year of challenging your capabilities has made its way.

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What do we do with the surplus of income over expenses i.e our savings. We keep some money for meeting our near term emergencies or commitments like paying our kids' school fee, a weekend getaway, a family function, etc. and we invest the rest. In this article we will focus on the former viz the money we keep with ourselves. Most people keep this money as hard cash in their homes or deposit the money in their savings bank account. In the financial world, it is practically a sin to keep cash at home, because of two reasons. 1. It is risky, can be lost or stolen and 2. It is not giving any return. Those people who are keeping this money in savings account do offer protection to their money but the return that you get is negligible.

Your money should at least cover the rate of inflation, because Rs. 1 Lac today will not be of as much value a year later. So, if you are looking for safety and similar convenience of withdrawal of your cash but with better returns, then Liquid Funds is your best bet.

What is a Liquid Fund?

A Liquid fund is a category of debt mutual funds, which invests in short term debt securities like certificate of deposits, treasury bills, commercial papers, term deposits, etc. having maturity of up to 91 days.

So if you want to park your extra cash and you need the money soon, say in a week or a month or few months , you don't have to adjust with the low returns offered by your savings bank account, you can stash the cash in Liquid Funds. You can invest in a liquid fund even for one day.

Savings account balances are huge in case of salaried people whose money keep on accumulating with every salary in their saving accounts.

Let's take an example of Mr. Ram, who is working in Infosys. Mr Ram gets a salary of Rs 100,000 per month and he is saving Rs 40,000 to Rs. 60,000 a month, which is getting accumulated in his saving account. For simplicity sake, lets assume

1. Mr. Ram is saving Rs 50,000 fixed in each month.
2. Mr. Ram withdraws Rs 50,000 on the first day of each month and his saving remains in his account for the entire month.
3. Semi – Annual Compounding, and we are considering a time period of 6 months, therefore compounding effect is ignored.

At the end of 6 months:

Value of Mr Ram's money in Savings Account @ 4% interest p.a. = Rs. 303,456

If Mr. Ram moves his savings in a Liquid Fund on the first day of each month

Value of Mr Ram's money in Liquid Fund @ 8% interest p.a. = Rs. 306,829

Just by moving his money from his saving account to a liquid fund, Mr Ram earns Rs 3,372 extra on the same investment.

Why should you invest in a liquid fund?

1. You can easily park your money for short intervals.
2. Money kept at home or in savings account is not growing, the returns are lower than the inflation rate in our country. Liquid funds offer higher returns, so that your money is able to catch up with and outperform inflation.
3. You can withdraw your investment anytime, without accruing any penalty.
4. Since Liquid Funds invest in fixed income securities with short maturities, hence they bear a lower risk.
5. No entry and exit loads, hence Liquid Funds are cost efficient for the investor.
6. If you do not withdraw your money from Liquid fund for over 3 years, you get the benefit of paying tax @ 20% with indexation. Short term returns are taxed as your saving bank returns.

Now you can earn extra income by moving your money from your cupboards, savings or current accounts into liquid funds. You get better returns and you can withdraw whenever you need.

India is in a state of Euphoria, celebrations are in the air with one festival lined up after the other, and we just wrapped up the biggest of all, Diwali. For many of you, your bosses/companies have made the festival of lights even more brighter, with the Diwali bonus. We have been looking forward to the festivities as well as the big money coming in, and the topic for today is the latter, the Bonus.

Generally, we are conservative in spending our monthly salaries, but when it comes to sudden inflow of money, we become liberal. We plan things around this jackpot, we treat our friends and family with a grand bonus party, followed by owning our desires, the new DSLR, the latest I-phone, diamond ring, Goa vacation, etc. So, soon after the bonus money lands into our accounts, it's blown in the air, most times serving no constructive purpose. So, it's this general approach towards bonuses, that prompts us to write this piece.

One central characteristic of money is its fungibility, the value of Rs 1 lac remains the same, irrespective of the source. So, whether Rs 2,000 is from your salary, or whether you found the note on the road, both carry same value, and can get you stuff of equal value. Taking the fungible nature of money at the core and also the fact that bonus is a big amount which you don't get routinely, we are sharing some tips which can help you make the most of your bonus.

1. Repay your Debt: The heaviest burden you can carry on your shoulders is the debt burden. Since you do not get a bounty in addition to your monthly salary every month, you should put this to good use, you can use it to significantly cut your debts. Begin with credit card bills and personal loans, since these carry massive interest rates, so a lot of your money is wiped away every month in interest payments. You can even consider offloading some of your other commitments, like home loan, car loan, etc. So, use the bonus wisely, throw the debt off, so that you can walk free.

2. Create or Contribute to your Emergency Fund: We need at least 6-8 months of our income handy at all times, to protect our shell during financial distress. There can be periods of less income or even no income, like in case of job loss, job switch, emergencies not covered under insurance, etc. You need money to survive, provide for the basic necessities in such situations, which calls for the need to have an adequate emergency fund. In case you don't have an emergency fund or it is inadequate, you must use the bonus in this direction.

3. Invest for your goals: According to Hindu mythology, Diwali time is a good mahurat, people try their luck in cards, lotteries, casinos, hoping to make big gains. But you must remember that luck is two-faced, sometimes it's on your side, sometimes not, hence you should stick to fundamentals and focus on long term wealth creation. Invest your Diwali bonus in your future, since the bonus is a big amount, it will be a big leap towards your goals.

4. Pursue your Passions: The football club you always wanted to join, the horticulture course you want to do, the music class you have been postponing, or a professional course you want to do which is going to accentuate your profile and help you grow in your career. This bonus is an opportunity to invest in yourself, which is otherwise difficult to manage from the routine income.

5. Don't let the bonus sit in your Saving Account: Some of us might have planned about how we are going to spend the bonus, while others are yet to decide the outlay. So, for those of you who have the bonus lying in their saving account with no intended immediate use, it is advisable that you shift it into a Liquid Fund. It will serve the dual purpose of yielding better returns for you than the saving account, plus it will protect the money from you, for you might end up ravaging a part of your bonus by casually swiping your debit card.

To conclude, The Diwali bonus is no lottery, it's the reward for the hard work that you have put for an entire year. Don't splurge it, rather employ it in a way so that it is able to make a difference. The above were few avenues which you can allocate your Diwali bonus to, as your contribution towards a brighter future.

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