An asset is anything of value that can be converted into cash. Individuals, companies, and governments own assets. Assets can create or preserve value over a period of time, this feature of holding value makes them important. Thus, one can define asset – as an economic resource that a) can be owned, and b) is expected to provide future economic benefits.
People buy assets with the understanding that assets should continue hold, or grow in value over time. Assets can be sub-divided into two groups –
- Tangible or fixed assets – Tangible assets are those that can be seen and touched physically. Common examples of tangible assets are cash, land, house, gold, plant, machinery and many more. It is very easy to buy and sell them since they are easy to verify in most cases.
- Intangible assets – Intangible assets typically cannot be seen and touched. They are non-physical assets. Common examples of intangible assets are patents, copyrights, trademarks, proprietary software, website, and many more. These assets provide advantages to their owners. It is not easy to buy, sell and maintain intangible assets since their value is subjective. Thus, they are created or acquired over a period of time.
What are the different types of asset?
Asset that exhibit similar characteristics and are subject to the same laws and regulations are grouped together into an asset class. There are five major asset classes – cash assets, debt, commodities, equity and Real-estate. Let us define each asset class with a few examples –
- Cash or currency assets – A cash asset is like having money in hand. One can easily use them for buying necessary goods and services. Most common examples of cash assets are cash in hand, cash in bank account and foreign currency.
- Debt or fixed income assets – Common example of debt or fixed income assets are bank fixed deposits, national saving certificates, various government bonds, corporate bonds, public provident fund, pension and many more. It refers to any investment where the issuer is obliged to pay a fixed amount on a fixed date for a fixed duration. Here the income generated does not vary for a fixed duration and your initial investment is returned back once the duration of investment is complete.
- Commodities – A commodity is used as an input for production of other goods or services. They are essentially the same product regardless of the producer. Common commodities are gold, silver, copper, iron, wheat, rice and many more. Commodities are used as raw materials by various businesses. They are converted into different products which are then purchased an individual or family for consumption.
- Equity or Stocks – Equity or stocks represent part ownership of business is bought by paying money. Common examples are listed and unlisted shares of various companies, and initial public offers (IPO) . Listed shares and IPO’s can be traded on various stock exchanges.
- Real-estate – Real estate includes land and buildings like plot, farm, house, flat, factory and many more. Real-estate assets signify ownership or right to use for a fixed period of time. Real-estate can be bought and sold with help of real-estate agents.
Each asset class has its own unique characteristics, usage, laws and regulations. An individual or family must have a basic understanding of each asset class before they invest in it. They can also take help of a qualified professional or a team of professionals to do the groundwork about the asset class.
How to buy an asset?
An individual or family buys assets using different investment vehicles. An Investment vehicle refers to a method used by an individual or family or business to gain ownership and hold their assets over time in order to maximize their returns while minimizing risks and taxes. Some of the most common investment vehicles are –
- Company – An individual or family creates a company which in turn is used to own various assets. Common examples of company structures are private limited company, limited liability partnership (LLP). In India, these organization structures are governed by rules defined under the Companies Act of India. Corporate structure provides multiple advantages which are otherwise not available to an individual. For a corporate, an asset might generate revenue, or bring benefit from owning or using the asset.
- Trusts – A trust is created when a person (settlor) gives property to another person (trustee) to hold for the benefit of a third person (beneficiary). A trust is a legal way to hold and protect assets for the future. A document called the trust deed defines the set of rules for the operation of trust. Trusts can hold assets, invest, borrow money, and operate businesses.
- Pooled Investment Vehicle – Multiple people come together and pool their money for different investments. It can take the form of mutual funds, pension funds, private funds, unit investment trusts (UITs), or hedge funds. This is to gain certain advantages of large numbers that would otherwise not be available to individuals.
Each type of investment vehicle has its own risks and rewards. Deciding which vehicle is most appropriate for an individual or family depends on one’s knowledge, investing skill, risk tolerance, goals and current financial standing. Again it is most suitable to take help of a qualified professional or a team of professionals to choose correct investment vehicle for buying an asset or investing into an asset class.
How much to buy?
An Individual or family buys different kinds of assets to meet various needs that will arise in future during their lifetimes. One can read more about an individual’s life-cycle and their needs here. And the method used to allocate resources to buy various assets is known as asset allocation. Asset allocation is the most important decision made by an individual or family as it determines the kind of future returns will be generated by their assets. Asset allocation is different for each individual and family – and is dependent on multiple factors like their financial knowledge, risk tolerance, goals and current financial standing. And there is no straightforward way of doing asset allocation for an individual or family. However risk profile and investment duration are the two most significant parameters taken into consideration while doing asset allocation.
Further, asset allocation is not a one-time exercise, rather it is an ongoing exercise where an individual or family periodically review all their assets and the returns generated by them. As part of review, one may decide to buy new or sell existing assets when there is significant change from the original allocation due to change in prevailing market conditions, personnel needs, time horizon or risk profile. Again, this exercise may be done alone or with help of qualified professionals.
We will talk more about each asset class, their unique characteristics, rules governing those asset classes in India, and various investment vehicles commonly used by an individual or family to acquire them as separate articles in this series.
In this article, we have provided you an overview about assets and different types of asset classes. Further we have introduced the concept of investment vehicles and asset allocation. And hopefully, this will create a basic foundation for a more in depth discussion on different asset classes in forthcoming articles. For more information please feel free to reach out to us via email at – firstname.lastname@example.org or by phone – 91-9515475381.
Next Article – Asset Classes Part – II : Introduction to various currency assets.
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