Explained: Asset Class

An asset class categorises investments which share common characteristics. At the same time, governed by a uniform set of laws and regulations. For instance, in Malaysia, stock market shares are grouped into equity asset class. It is subject to Securities Commission Malaysia jurisdiction.

What is it?

It consists of diverse financial instruments that frequently demonstrate analogous behaviours within the market milieu.

Types of Asset Class

Prominent examples encompass:

Cash and Cash Equivalents
- Saving accounts, fixed deposits and money market
Fixed income
- Bond [2] and sukuk
Real estate
- Property
Equities [1]
- Unit trust, ETF, REITs, stock market and warrant
Commodity
- Crude oil
Derivatives [3]
- Futures crude palm oil
Speculative
- Cryptocurrency and NFT
Alternatives investment
- Hedge fund, Private Equity, Venture Capital,

Asset Allocation – Minimising the Risk

Inter-asset class correlations tend to be limited. Often exhibiting an inverse or negative relationship. While equities may thrive in certain periods, bonds, real estate, and commodities might not yield favourable results.

Conversely, during a bearish stock market, other assets like real estate or bonds may deliver above average returns, offering potential risk mitigation. To mitigate risk exposure in a specific asset class, investors can adopt a prudent strategy of simultaneous investments in very diverse portfolios.

This practice is known as asset allocation. Aims to diversify the investment portfolio. Thereby reducing overall risk and enhancing the potential for optimised returns [4]

For Diversification

Financial planners place emphasis on asset allocation as a strategic approach to assist investors in achieving portfolio diversification. Thereby optimising potential returns. By allocating investments across various classes. A desired level of diversity is attained in the investment spectrum.

Each distinct asset class is anticipated to manifest unique risk and return attributes. Enabling varied performance outcomes across diverse market conditions.

Risk Tolerance

Understanding this topic helps you know the nature of different investments you may choose to trade. Some investments, like Futures, carry higher risks than bonds or equities. Deciding how to diversify your investments is a personal choice based on your goals and risk tolerance.

If you prefer safety, you may invest in low risk assets or diversify within a single asset class. On the other hand, if you can handle more risk, you might focus on finding the asset class with the highest profit potential. Even if it means less diversification [5]

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