{"id":11656,"date":"2020-09-11T12:36:00","date_gmt":"2020-09-11T12:36:00","guid":{"rendered":"\/blog\/?p=11656"},"modified":"2024-10-25T09:59:58","modified_gmt":"2024-10-25T09:59:58","slug":"investing-in-different-asset-classes-based-on-their-risk","status":"publish","type":"post","link":"https:\/\/www.tatacapitalmoneyfy.com\/blog\/investment-guide\/investing-in-different-asset-classes-based-on-their-risk\/","title":{"rendered":"Investing in different asset classes based on their risk"},"content":{"rendered":"\n

One of the most oft repeated\nmantras in investing is diversification. Investment wisdom says don\u2019t just own\nthe stock of an umbrella maker \u2014 what if it stops raining? It\u2019s for good reason\nthat an investor who holds umbrella securities should ideally own some ice\ncream or sunscreen stocks too so that there\u2019s room to make up for losses, or\nmake gains, even when there\u2019s no downpour.<\/p>\n\n\n\n

There are basically two kinds of risks one needs to consider while\ninvesting \u2014 systematic risks and unsystematic risks. Systematic risk \u2014 a black\nswan event such as a global recession or a pandemic \u2014 could be mitigated by\nconsidering how volatile a security is compared to the wider market. To protect\nyour portfolio against such risks you need to diversify by investing in asset classes\nthat can absorb systemic shocks better. Unsystematic risk can be thought of as\nrisks associated with a particular sector or company such as government\nregulation and disruption by a new entrant.<\/p>\n\n\n\n

Asset Classes based on their Risk<\/strong><\/h2>\n\n\n\n

Let\u2019s look at a few asset classes considered less risky and essential to the diversification of a portfolio:<\/strong><\/p>\n\n\n\n

a) Gold <\/h3>\n\n\n\n

The\nyellow metal is the number one choice of safe harbour for an investor.\nGenerally, when there\u2019s an economic downturn or markets are crashing worldwide,\ninvestors take refuge in gold. Part of the reason why gold is so resilient is\nbecause it is thought to be something that will never go out of fashion \u2014 it\nwill always be worth something. There are many ways to invest in it \u2014 one could\nown physical gold, buy gold stocks or invest in a gold fund. Gold bonds too are gaining popularity nowadays as a way of holding the precious\nmetal. <\/p>\n\n\n\n

Sovereign\ngold bonds are thought to be one of the best options as you can not only benefit\nfrom an increase in prices of the yellow metal but also avail a 2.5%  interest for the tenure of your holding. Gold bonds have a lock in period of eight years. <\/p>\n\n\n\n

b) Government bonds<\/h3>\n\n\n\n

Government\nbonds are thought to be one of the most secure\ninvestments. The more stable a government and its fiscal math are, the smaller\nthe risk associated with its bonds. This is why treasuries issued by the US\ngovernment are one of the few asset classes that is a must have for big fund\nhouses. It ensures that in the event that everything fails and no institution\ncan keep their financial commitments, there\u2019s at least one basket of investment\nwhich will uphold its promise. <\/p>\n\n\n\n

c) Corporate bonds <\/h3>\n\n\n\n

Corporate\nbonds are debt instruments \u2014 you are a\ncreditor to the company when you hold their corporate bond unlike stocks which\nqualify you as a part-owner. Though not as risk proof as gold and government bonds, corporate bonds are seen to be a significant part of\ndiversification. Some of the biggest companies of the world are perceived to be\nas financially resilient as governments. Moreover, when the stock markets are\ncrashing or a company goes bankrupt, holders of corporate bonds can still expect to make\nsome gains.  <\/p>\n\n\n\n

d) Multi Asset Funds<\/h3>\n\n\n\n

Multi-asset\nfunds fall in the hybrid category of MF schemes and  invest at least 10% of their portfolio in a\nminimum of three asset classes. These funds generally have portfolios that are\nmore diversified than traditional hybrid funds which invest in varying\ncombinations of equities and bonds. Returns from financial assets like equity\nand bond markets tend to show greater co-movement and hence lower\ndiversification benefits. As such adding asset classes such as gold, real\nestate and international equity,  whose\nreturns show a lower correlation with traditional asset classes, could help\nlend a true multi-asset class flavour to your asset allocation. The good\nperformance of any one of the underlying assets might help cushion against the\npoor performance of others.<\/p>\n\n\n\n

Creating a diversified portfolio<\/strong>–<\/h2>\n\n\n\n

While the three investment\navenues above are a great way to protect your money, they can never be good\nwealth creators. As such, it is important to keep one\u2019s financial goals in mind\nand not go overboard with fixed income assets like bonds and gold while\ndiversifying. There should be a healthy allocation to equities in different\nsectors, real estate, commodities etc. <\/p>\n\n\n\n

Additional Read:<\/strong> Benefit of Asset Allocation in the Portfolio<\/a><\/p>\n\n\n\n

\"Optimal<\/figure>\n\n\n\n

Most individual investors would neither have the skills nor the inclination to track so many asset classes and redistribute allocations regularly. This is where a mutual fund helps. A mutual fund is basically a basket of investments across different asset classes and time frames bundled into a unit for individual investors. You can also choose to invest in a mutual fund that is more inclined to a certain risk profile or asset class. The best characteristic of a well balanced mutual fund is that for a small amount you can stay invested in a multitude of assets, giving your money the best chance to grow while also protecting it from the risk of an all eggs in one basket approach. <\/p>\n\n\n\n

Additional Read<\/strong>:\u00a0Understanding Mutual Fund Terminologies<\/a><\/p>\n\n\n\n

If you are looking for a hassle-free way to diversify your portfolio, the Moneyfy app from Tata Capital is a great tool. You can invest in mutual funds<\/a> and gold funds on the platform. It also helps you compare funds on the basis of category, investment horizon, returns et al. <\/p>\n\n\n\n

Download Moneyfy App<\/a><\/div>\n","protected":false},"excerpt":{"rendered":"

One of the most oft repeated mantras in investing is diversification. Investment wisdom says don\u2019t just own the stock of an umbrella maker \u2014 what if it stops raining? <\/p>\n

Read More<\/a><\/p>\n","protected":false},"author":1,"featured_media":11658,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[68],"tags":[],"yoast_head":"\nInvesting in different Asset Classes based on Risk - Tata Capital Blog<\/title>\n<meta name=\"description\" content=\"Asset Allocation: Diversify your portfolio by investing in different asset classes based on their Risk. 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