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.

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