Asset classes consist of a group of securities with varying levels of risk as given below:
Each asset class has different investment features, for example, the level of risk and potential for delivering returns and performance in different market conditions. A balanced portfolio uses the different characteristics of each asset class in an attempt to smoothen fluctuations in performance and balance risk
Equities are shares of ownership in a company. When you buy equities, also known as shares/stocks, you are effectively becoming a part owner of that business. Historically, investing in equities has the potential to generate potentially higher returns in the longer term than other investments, such as bonds, helping you meet your long-term investment objectives.
The value of investments will fluctuate subject to the performance of Stock Market with other relevant economic factors, which cause fund prices to fall as well as rise and you may not get back the original amount you invested.
When the company performs well, the price of your shares may go up. When it does poorly, that price may fall. A good fund manager essentially identifies a good company and the best time to invest in.
Dividend is a distribution of a portion of company’s earnings which are paid out as decided by the Board of Director to a company’s shareholders at set times of the year. They generally represent a part in the profits of the company and will vary depending on the company’s business strategy and how well it is doing. The board that runs the company’s affairs will decide how much profit to pay out as a dividend to its shareholders and how much profit to reinvest into the company to drive future growth.
If you hold the shares directly, any dividends will be paid to you as the shareholder, but if you’ve invested in equities via a mutual fund, the dividends are paid to the fund. The managers of the fund then decide to pay an annual dividend to its investors.
As a mutual fund investor, you can choose whether you want to:
Fixed income securities include Government Securities (T-Bills, PIBs etc.) and other debt instruments usually issued by corporates (bonds, TFCs) which normally pay a fixed/variable rate of interest based on the instrument structure over a given period of time period, at the time of maturity upon which the principal amount is also repaid.
They potentially offer a more predictable income for investors when compared to riskier asset classes, such as equities, and could help to bring an important element of diversification to your investment portfolio. Fixed Income Securities are generally considered to offer stable returns, and to be lower risk than equities – and hence deliver lower returns than equities. The value of investments may fluctuate subject to the prevailing discount rate, which will cause the investment value to fluctuate.
When you buy this type of securities, you’re effectively extending a loan to the issuer. T- Bills/Corporate Bonds/Sukuks can be issued by governments or companies. Government securities are generally issued to fund public spending on projects like new roads and schools, while a company may issue Corporate Bonds/Sukuks as a way of financing new business opportunities.
On the day that the bond matures, known as the ‘redemption’ or ‘maturity’ date, you usually get back your original investment also known as the Principal. After buying a bond, you don’t have to hold onto it until the maturity date. Just as a company’s shares can be bought and sold on the stock market, bonds can also be traded throughout their lifetime.
The amount borrowed/ purchased Sukuk by the issuer that must be repaid to the holder of the bond is known as the ‘principal’. This is also known as ‘face value’ or ‘par value’ and is set when the bond is issued. The price of the bond will change between the date of issue and the maturity date, as the bond is bought and sold on the open market.
Cash tends to be normally held within a bank account where interest can be earned. Among investment instrument, cash funds use their market power in an effort to get better rates of return on deposits than you would get in an ordinary bank account. They usually invest in very short-term bonds commonly known as ‘money market instruments’, which are essentially banks lending money to each other.
The exchange of commodities characterizes one of the most primitive forms of trade in human history. Markets for goods trading have existed for centuries. Commodities are a distinct asset class with returns that are largely independent of traditional asset classes like stock and bond returns. Today investors have an option to choose from a variety of vehicles for investing in the commodities futures markets including mutual funds, exchange-traded funds or notes, covering the wide spectrum from single commodity based exposure to sector based and broad based commodity exposures.
Commodities markets today can offer quite attractive opportunities to investors. Commodities’ low correlation to traditional assets illustrates what may be the most significant benefit of broad exposure to commodities: diversification. Asset classes tend not to move in sync with each other, which tends to reduce the volatility of the overall diversified portfolio. This lower volatility reduces portfolio risk and should improve the stability of returns over time. However, diversification does not ensure against loss. Given their impact on consumer goods prices, commodities can also offer inflation-hedging.
Real Estate as an asset class in a portfolio can offer stable income, partial protection against inflation, and good diversification with other investments in the portfolio.
Modern portfolio theory proposes that the most effective way to maximize returns while at the same time minimizing risk is to add uncorrelated assets. Within the context of a multi-asset portfolio (composed of stocks, bonds, and other asset classes), real estate may provide significant benefits, as correlations with stocks and bonds over time have been low. Another benefit of investing in real estate is a hedge against inflation. With inflation increase, your potential rental income and property value increases considerably. With the increasing cost of living, so does the cash flow.
The value of investments in property, a physical asset, and the income from them, will fluctuate. Property investments can be harder to buy and sell when compared to investments in fixed income securities and equities. An investment in the real estate fund may be linked to those risks normally associated with an investment in company shares or fixed income securities.
