An asset class refers to a group of assets with similar investment characteristics. Within an asset class, the financial securities exhibit similar risk and return patterns.
Equities, real estate, debt, commodities and cash are few of the commonly used asset classes.
The following chart shows the different kinds of asset classes and their popular constituents:-
Asset classes are used to diversify an investment portfolio. The division of assets under asset classes lets an investor decide which groups to put money in. For this, asset classes are categorised in a way they are mutually exclusive in their risk and return expectations and don’t bear high positive correlations with each other. A positive correlation would mean if one does badly for some reason the other would too, pulling down returns for the investor.
An asset class’ liquidity and transaction cost also matter when being chosen, along with its risk and return traits. If liquidity is low and/or transaction cost high, the asset class might not be viable to park a sizable portion of one’s investment, irrespective of the risk and return profile being a good match.