If you keep your money invested, it usually grows over time. But there is no guarantee. There might even be instances where your invested money decreases over time. This happens because there is risk which all asset classes carry, wherever you invest your money.
Risk and return go hand in hand. This means that higher the risk you take, better is your potential return. Higher expected returns can always lure you as an investor. But you should choose the asset class depending on your risk appetite. Another important factor which you should keep in mind are your investment objectives and the duration for which you would be investing.
Stocks of any company are one of the most risky asset classes. Stock prices can move anywhere depending on the company’s performance, overall industry and market conditions. Stocks carry high market risk.
However, stocks of good performing companies can give huge returns. They are a way to create wealth in the long term.
Bonds are fixed income instruments issued by government and companies to raise capital. They offer fixed regular income, which is called coupon, to the holders of the bond throughout the tenure and return of capital at the end.
However, bonds are not very popular among retail investors for various reasons. But they are a good choice if you are looking for less risky investment option. You can buy and sell bonds in the secondary market just like stocks. But liquidity here is an issue due to the dearth of buyers and sellers.
Bonds carry very little market risk as the payments to the bond holders are pre-decided. Bonds do carry high credit risk as the issuer of the bond might default on payments in case financial trouble arises. However, government bonds do not carry that risk.
Bank deposits are one of the safest investment options. They offer pre-decided fixed returns.
Bank deposits offer lower returns when compared to stocks or bonds. They are a good investment choice if you are looking for safety of your capital. They are good options for short-term investments too. Keep them in your portfolio to balance your otherwise risky portfolio too.
Real Estate is a very traditional form of asset you can have. Real estate is good for very long tem investment as liquidity is low and transaction costs are very high. Also managing real estate properties could be a big issue in certain cases.
Real estate has been proven to give great returns if kept for long term.
Gold is also a traditional form asset. It offers great returns if held for long term.
Price of gold is seen to remain stable or rise when capital markets or economy, in general, go through tough times. Hence, gold provides protection from the swings of capital markets .
Keep some gold in your portfolio to balance it and also to protect yourself from the huge swings in the capital markets.
The goal of any investor is to minimise the risk while meeting the desired level of return. To achieve this goal, you, as an investor, need to know the risk-return profile of any asset.
Your investment objectives, time horizon, amount of money you have to invest and your own risk appetite are important factors which you should consider before deciding on your optimal portfolio.
Your portfolio can range from highly conservative to highly aggressive depending on your investments needs and risk tolerance.