Different Asset Classes and their advantages and disadvantages (Part-III)

Part-III: Cash and cash equivalent.

Most people think that only investments generating cash are assets, however, even cash itself is an asset class as it gives you purchasing power when any opportunity arrives and cash in saving bank account can also generate return. Cash saves you from liquidity crunch. In business world, excellent opportunities does not last longer. In such scenario, those who are having cash in hand have more chance to gain from such short-term opportunity. There is only one disadvantage of cash that it’s return cannot beat inflation. If you keep cash in your bank account for long time, due to inflation, its value will decrease.

To overcome this problem, you can invest in liquid funds where you can withdraw your money within a day. Liquid funds normally gives better return than saving bank. Alternatively, you can park your money in “sweep in FD”. Kotak is one such bank providing this facility. All you have to do is link your existing Fixed Deposit to your Savings or Current Account in Kotak bank.  In case you are falling short of funds in your account the deficit will be withdrawn from your Fixed Deposit. The Sweep-In facility helps you enjoy liquidity in your Savings account while earning high returns with the applicable interest rates of a Fixed Deposit.

With the Sweep-In facility you can link your existing Fixed Deposit to the Savings/Current Account. Whenever there is a shortfall of funds in the Account to clear a cheque, we will utilize units of the Fixed Deposit to clear the cheque. On this utilized amount, you will earn a rate of interest for the period that the Fixed Deposit remained with the Bank at the applicable rate of interest at the time of booking the original Fixed Deposit. Your balance amount in Fixed Deposits will continue to earn the original rate of interest.

For more details, please contact bank representative. A small disclaimer: this article is not sponsor by any bank; some information about sweep in facility is from Kotak bank website for education purpose.  

It is very important to keep some cash with you and treat it as a liquid asset. Never invest 100% of you portfolio in illiquid asset. Always keep some cash with you based on market situation and your risk appetite. Consult an experienced and qualified investment advisor for making a well-balanced and diversified investment portfolio.

I am an investor and two year back I developed interest in finance and investment. I manage my own portfolio and still learning about new investment options. However, I am not a certified investment advisor and this blog is not an investment advice, it is only for education in good faith.

Different Asset Classes and their advantages and disadvantages (Part-II)

Part-II: Stocks and Mutual funds

In first part I discussed about real estate, which is very popular asset class and investment in real estate is consider quite safe and profitable. However, there is a drawback of liquidity.

To overcome this drawback of liquidity and to increase profitability by taking higher risk you can invest in stocks and mutual funds. You can easily buy and sell stocks and mutual funds using different digital platforms or through recognized brokers and distributers. It has T+2 days settlement cycle. i.e. on third working day, your money will be deposited in your account.

So, the first advantage of this asset class is that it can be converted to cash with in three working days. Secondly, in long term, it can generate better return than FD and rental income. If we consider past few decades, NIFTY-50 and Sensex (benchmark index for share market) has given around 12% annual return. So, if you invest in Index fund you can expect to earn 10-12% annual return subject to market risk. If you do not know anything about share market, do not invest in shares. Better invest in equity mutual funds based on financial advisor and your research.

Debt funds are another type of mutual funds. While equity mutual funds invest in shares, debt funds invest in debt instruments like commercial papers, debentures and government securities.

Debt funds are more secure than equity funds when national economy is in good condition. However, they too involve credit risk and interest risk. Credit risk can be more prevalent when economy is going down. In such times, one has to be very careful and invest only in AAA rated papers or in sovereign bonds to save investment from credit risk.

When interest rate is going down, debt fund yield goes up and when interest rate is going up, debt fund bond yield is going down. This is called interest risk. In such cases, when interest rate are already down, you can opt for floating interest debt funds. When interest rate will increase their yield will not decrease as interest rate is floating i.e variable.

It is important to create balanced and well diversified portfolio to mitigate risk and increase return in both bull and bear market. To achieve this, add both debt and equity in your portfolio based on your risk appetite and time horizon.

In next article I will discuss third asset class which is CASH.

Different Asset Classes and their advantages and disadvantages (Part-1)

Part-I :Real Estate  (Flats/home/Plot/Shops)

Saving is a good habit, investing it is even better. In India, most of people invest based on friend and family advice. Consulting investment advisor or investing based on your own research is very rare. In such scenario, most of people invest in real estate because it is one of the oldest investment class and chances of loss is negligible. Due to ever increasing population, real estate gives good return in long term. However, there are some disadvantages too. Firstly, there is a default risk. Many times it happens that same property is sold to two parties. Secondly, there is a risk of capturing of your land by some goon. In both cases you have to fight long legal battle which will waste lot of money and time. Thirdly, you have to buy property at market rate or below market rate to generate profit in short run. Also, you must have idea of location. If you buy property at wrong location, you have to wait for long time before you see any appreciation. Finally, all type of properties are not good investment. It depends on your goal and your requirements.

Suppose, you already have a home to live, and you buy a flat for rental income. This will be a bad investment because rental income of commercial property is more than rental income of residential property. Also, flat needs constant maintenance and you also have to pay society charges! Which will even further reduce your rental income.

Now, let’s take an example of a Plot or a land. If you buy a plot away from the city area, you have to wait for long time before any significant increment. Plots within the city are very expensive. If property market crashed or there is a slowdown, again you have to wait for long time before making money by selling it.  

One bigger problem with property is that it is not liquid asset. i.e. It cannot be converted into money immediately. It takes more than one month to find a prospective costumer and transfer property on his/her name.

Thus, Even though investment in real estate is good and can be made risk free with proper research and investigation, it is not the best investment for every individual. There are several other asset classes which one should consider before investing in real estate. Different asset classes outperform in different time. For example, during COVID-19 Pandemic, Gold outperform most of asset classes. While rental income hit hard.

Hence, during investing make a diversified portfolio to mitigate risk. Learn about different asset class and take help of financial advisor before investing large sums of money. Your parents and friends definitely gives you right advise from their prospective but they may not be able to give best investment advice until and unless they themselves belongs to financial field. Which is not the case in most of the cases. Doing your own research is very important. Lot of information is available on internet. If you do not like reading, you can watch Youtube videos. Even all financial advisors are not updating their skills and in some cases there can be clash of interest. Suppose your financial advisor is selling insurance too. He might try to sell you life insurance for your whole family when you only need life insurance for earning members! So, the only option left is self-research. It is your hard earned money, so you are the one to take final decision after checking all the options available and your requirements.

In next part I will discuss another asset class – Stocks and Mutual funds. Please press the like button if you like this article.