Investment terms are often thrown around without any explanation as to what they actually mean. The term “asset classes” is a case in point.
To assist you in understanding this the next time it comes up, we have defined this product set below, and outlined the main types in South Africa.
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What is an asset class?
There are a large number of investments you can choose from. Each of these is governed by its own rules and regulations, and offers different degrees of risk and profit.
To help both consumers and industry professionals navigate this minefield, these investments are grouped into asset classes.
In addition to simplifying a complex world, asset classes assist investors in categorising their investments so that they can be sure they have a diversified portfolio.
READ MORE: The benefits of assessing investments regularly.
What are the main asset classes?
According to Ruvan Grobler, wealth manager at Bovest, there are four main asset classes that a South African investment fund would allocate towards, depending on the mandate of the fund.
- Money Market: This is a highly liquid asset class. They are short-term instruments that carry little risk, and include cash or cash-equivalent securities. The time horizon is short, usually under three years.
- Bonds: This is a fixed income instrument where an investor effectively loans capital to a company or government, which is paid back over a pre-determined period at a fixed- or variable interest rate. This time horizon is medium – often two to ten years.
- Listed property: This is when you buy shares in a company that develops and manages real estate and is listed on the stock exchange. You can earn regular dividends from rental income as well as possible share price growth. The time horizon is medium to long.
- Equities: This involves buying shares in a company that’s listed on a stock exchange (for example, Naspers or MTN) to earn a combination of dividends (profit allocation) or growth in share price for future sale. This time horizon is long, such as ten to 20 years.
“These four main asset classes each carry a potential risk and return over a specific investment horizon or term for the investor,” says Grobler.
He explains that each of the above classes may be used to form a fund that exclusively allocates towards a specific asset and would be called a “single asset fund”.
“These asset classes may also be combined in actively managed funds with a specific mandate, such as balanced asset funds or multi-asset funds,” says Grobler.
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