The word “asset” can be interpreted in many ways.
Generally, an asset is defined as something of value to someone. A car is an asset. A house is an asset too. Even something as abstract as “knowledge” is considered an asset (in this case, a human asset).
Of course, while the same car or house may be an asset to someone, it could also be a liability to another person – it all depends on whether the owner derives any value from owning the car or house.
Take for example, if you own a car that consistently breaks down, is very expensive to maintain and causes more frustration than pleasure, you could easily argue that the car represents more of a liability to you than an asset.
What is an asset class?
In the investment world, many different types of assets exist. These assets can be divided into categories based on a number of characteristics (e.g. the asset’s return and risk profile, the type of income it provides, the amount of initial investment etc).
As an investor, you should have a good grasp of the main asset classes that exist and the differences between them. Let’s take a look at some of these key asset classes below:
Cash
As its name suggests, cash is simply… cash i.e. the paper money in your wallet. However, in the investment world, the “cash” asset class is normally defined as investments that can easily be transformed into cash within a short period (usually 12 months). Under this boarder definition, cash would include any money in your savings, current, or fixed deposit account.
Cash investments typically offer investors a very low level of return (profit), but are also very low risk – you seldom lose money by investing in cash.
Bond
Bonds are similar to loans. As a bond investor, you “lend” money to the bond issuer, who is typically a government or a large corporation. In return for lending money, you are promised a regular interest payment throughout the loan period.
One of the primary risks to a bond investor is in the form of “counterparty risk” – the risk that the borrower fails to repay you the money you lent. Due to the nature of these borrowers (e.g. government or large corporations), bonds are generally considered low risk investments. Bonds usually also have low level of returns, although, they tend to be higher than cash.
Property
Many people are familiar with property investments – these are physical, brick-and-mortar assets, usually in the form of a house or an apartment, that appreciate / depreciate in value and pay a regular income known as “rent”.
Property investments also include shop lots, retail outlets, and on a larger scale – shopping malls, hotels, office buildings and industrial parks.
Share
A share (or share certificate) is a legal document that certifies ownership of a specific company. When you own shares in a company, you are considered to be a part-owner of the company (i.e. a “shareholder”). As a part-owner or shareholder, you benefit from any growth of the company.
Returns from investing in shares come in the form of income (dividend) or capital growth (increase in the share price).
Share investments are typically considered to have high level of risk and high potential return over the long term compared to cash, bonds or property.
Differences between major asset classes
Asset classes are groups of similar investment products. Most financial guides for beginners often recommend investors to invest in different asset classes. The logic lies in spreading your risks. So, if one type of asset is not performing, the others may perform better.
The flip side is that the investment cost to own different types of asset classes can be expensive. The fact is that these upfront expenses will eat into the profits you may earn from your investments.
There are fund management fees, trustee fees, and costs to acquire certain assets by fund managers. All these costs added up over a long period of time will significantly affect your overall returns.
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