Stock Market Vs Other Asset Classes: Where Should You Invest?

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Whether you are just getting your feet wet when it comes to investing or are a veteran of financial markets, it’s always wise to be well-informed on different asset classes and investments and their place in different investment scenarios and economic climates. An asset class is a set of investments that share similar traits and are governed by the same rules and laws. Thus, the instruments that make up asset classes often exhibit similar market behaviour.

Before making any investments, it is imperative to be mindful of two factors: the end financial goal (your RoI expectations) and the time horizon (how long it will take to achieve the said RoI). Based on these two factors, you can size up your options and decide which investment asset class is right for you.

Stocks (equities) are one of the most popular investment classes. If you want to achieve long-term financial goals such as retirement plans, children’s higher education, etc., investing in stocks from a long-term perspective has historically paid off.

Of course, whenever there is a promise of great returns the risk of losses also goes hand-in-hand. Returns on stock market investments are never guaranteed. But if you get your due diligence right, avoid market distractions, and focus on long-term goals, equity can be a rewarding investment class.

However, other asset classes may also align with your investment goals—bonds, gold, real estate,  to name a few. So how do you calibrate your goals and expectations, as well as factor in issues like market volatility to develop the right investment portfolio for you?

Let’s look at each asset class and see how they compare with equity.

Stocks versus debt instruments

Debt instruments cover bank deposits, bonds, public provident funds (PPF), post office deposits, etc. They provide fixed returns based on interest rate and tend to be safer than equities since they are less volatile.

The primary distinction between debt and stocks (equity) is that while the former denotes a loan from you in a sense, the latter is a share of ownership in the company you invest in. Debt instruments cap your earnings based on the interest rate. Stock returns don’t have limits on potential profits; they simply depend on the company’s market performance.

Gold and other commodities

India has a fascination for gold, and it’s not just based on our love for jewellery and a sense of nostalgia from India’s glorious past. The demand for gold is only rising because of the limited quantity of gold available.

While you can buy physical gold mutual fund houses are another significant gold investment route. They provide investment vehicles such as gold mutual funds and exchange-traded funds (ETFs), that enable investors to indirectly purchase gold as an investment.

In many ways, investing in gold requires significantly less effort than investing in stocks, especially as a long-term investment. However, it stands to reason that for an investment period longer than a decade, you could create much greater wealth in the stock exchange with smart investments.

Real estate

Because of its tangible nature real estate investment has always been popular in India. And given rapid urbanisation property rates in the past had risen at a fast clip.

However, in the past few years the property market has been quite uncertain, and many areas have witnessed stagnating prices. Several factors also determine returns, such as municipal planning, socio-political settings, and project development.

When comparing returns, transparency, tax treatment, liquidity, and other factors, stock investments greatly outperform real estate. Add to that, real estate ventures frequently call for substantial sums of money, which can significantly increase the risks involved, especially if you’re not highly experienced with this particular asset class.

Read a comprehensive breakdown of real estate versus equity investments here.

Money market instruments

While it comes under the broad umbrella of debt instruments, this category deserves its own section owing to its popularity and varied applications.

Money market instruments are financial tools that assist businesses, corporations, and government organisations in raising short-term financing for their objectives. The lenders profit from interest rates and liquidity, while the borrowers affordably cover their short-term needs. Some examples of money market instruments are bonds, treasury bills, certificates of deposit, and commercial paper.

Comparatively speaking, money market instruments provide greater liquidity than other fixed-income securities, especially since there is no lock-in period. Additionally, a money market instrument’s rate of return is slightly greater than the interest on savings accounts.

However, these investments may not be ideal for long-term goals. Furthermore, their interest rates don’t often match economic inflation. As a result, if your investment goal is to achieve capital appreciation and outperform inflation, equities might be worth another look.

Cryptocurrency

Investor interest in cryptocurrency has increased significantly in recent years. Bitcoin had a market cap of $1.2 trillion at its most recent peak in November 2021, while the value of all Ethereum tokens was $540 billion. While the numbers are much lower now, crypto is definitely finding acceptance as an asset class though clearly cryptocurrencies are the most volatile asset class.

Since a stock essentially reflects ownership in a real company, it enables investors to base their choices on factors like financial performance, cash on hand, growth potential, and more. A cryptocurrency’s value may someday have similar characteristics if and when people begin to utilise them in real-world transactions and crypto-based applications. But that day has not yet arrived. For now, supply and demand essentially determine a cryptocurrency’s market value. Add to this there are risks related to regulation too as many governments across the world are uncomfortable with cryptocurrency and financial regulators aren’t gung-ho either.

The last word

Investment options are aplenty. All of them serve specific purposes, suitable for specific situations and individual goals. If you’re looking to invest your hard-earned money, you will definitely want to ensure that you can maximise returns while mitigating potential risks.

Stock market investment decisions require rigorous analysis and sound judgement. But those who follow investment best practices, do their research well, don’t follow the herd, and stick to their long-term goals are often rewarded for their perseverance.