Where to invest my Salary? Asset Allocation explained | Basic Finance – Class 2 #Finance

Welcome to Class 2 of Basic Finance. In the previous episode, we ended by saying where to invest. So the four asset classes where you can invest are gold, Real

Estate, Equity, and Bonds. But apart from that, you need to understand what is an asset, what are the types of Assets, for how long to stay invested in them, what is long-term and short-term investing, and what is an asset allocation, and

all this will be discussed in this CashNews.co. If you want to know why you need to invest and how much do you need to start your investing journey with, then you can watch Episode 1, the link of which is given below in the description. But if you are already convinced, then you have come to the

right place. I am Aastha Khurana and welcome to Zerodha Varsity CashNews.cos. Let’s begin. So now that we are talking about investing in Assets, so I asked Veer, what is an asset? So an asset basically means anything that has monetary value in the current and future which you

can convert into cash. For example, your parent’s house is an asset because it has current value, it will have future value too, and whenever that house is sold, it will be converted into cash. And these Assets help to preserve, transmit, and generate wealth. So let’s

start with the first asset class and that is gold. I reminded Veer how we studied in school that in the old times there was a barter system. Currency notes came much later as a medium of exchange. Gold and silver were the ones that were used as a medium of exchange. So our

Investments in gold as the medium of exchange is going on since the ancient era. Also gold is an important asset class because it is a rare metal, its supply is very limited, it is a medium of exchange, and whenever there is war or Inflation, this asset class

becomes very important at that time. There are many ways to invest in gold. First of all, everyone must be aware of buying physical gold. Apart from this, you can actually buy sovereign gold Bonds, or you can also buy gold bold; color: #1a73e8; text-decoration: none;">ETFs. But to know all of this in detail and which one is better, do watch this CashNews.co. But for now you know that when you start your investment journey, then this is one of the asset classes that you can have in your Portfolio.

Now let’s come to our second asset class and that is Real Estate. There are two benefits of investing in Real Estate. First of all, over the period of time the value of your property increases. Suppose there is a property whose value is 5 lakhs right now,

after 3 years its value will actually become 6.5 lakhs, so you have a gain of 1.5 lakhs. And the second benefit is that if you give that property on rent, then you can also start getting rental Yield. And that is why investing in Real Estate gives you both these

benefits. But Veer tells me that I don’t have so much money, do you know how expensive Real Estate is? And I was like, fair point! But do you know about a relatively newer asset class in Real Estate? That is REITs, Real Estate Investment

Trusts. Now REITs eliminate the limitations of our Real Estate asset class. First of all, to invest in REITs, you do not require a lot of Capital. Apart from this, you cannot transport normal Real Estate, it’s not used as a medium of

exchange, there are Liquidity problems in it, but you do not find all these problems in REITs. REITs are new and maybe a bit overwhelming concept for you, so you should watch this CashNews.co to understand this asset class better. Now let’s talk about our two financial

Assets. First Equity and second Bonds. If I talk about Equity, then by Equity we mean stake or ownership. Whenever you invest in the Equity of a company, it means you become its shareholder,

meaning you’re the owner for that portion. Now if we talk about a businessman who has his own business or a company which has its own management, then in that case those individuals have more risk compared to other people. So just because you are a shareholder or owner for a certain portion,

that is why your risk appetite also increases. But it is said that higher the risk higher the reward. So that is why investing in Equity as an asset class can be better for you. If we talk about Equity, then there are 3 ways to invest in it too, via stocks, via

mutual funds, via ETFs. Now we will discuss all these three in detail in individual episodes but in the upcoming episodes. Now let’s talk about our second financial asset and that was

Bonds. Unlike Equity where you are a part owner of the Capital that you have invested, Bonds are like Loans, you give a Loan to a company or an institution. And because you are giving them a

Loan, that’s why your risk in it is less. But because the risk is less, the returns in it are also comparatively less. A few examples of Bonds are like government Bonds, corporate Bonds, municipal Bonds, etc.

Now after listening to all the asset classes, Veer came to the conclusion that the highest returns are available in Equity and that’s why he should invest in Equity, but then I showed Veer a chart. In that chart it was depicted that every year there is some

other asset class that performs better. Meaning if this year gold has performed better, then next year equities will perform better, and the next year government Securities have performed better. Meaning it is not wise to put all your eggs in one basket. Then Veer asked me what

should I say about this now? So I said, to optimize his returns and investment he needs to do asset allocations. Asset allocation means splitting your Capital in various Assets. For example, Veer wants to save 10K, and we have discussed 4 asset classes, so he can

divide 2.5K each in all these asset classes. If he wants, he can keep the contribution higher in one asset class, lower in another, and if Veer wants, he can also skip an asset class about which he does not have much knowledge yet, such as REITs. See the idea is that you will gradually understand

the risk profile or performance of a specific asset in the market over time. So, it’s absolutely okay if initially you don’t add that asset class to your Portfolio, you can add it to your Portfolio later. Ok, but there is no hard and fast rule that you have

to invest in only these 4 asset classes. If you are not feeling comfortable, then you can start your investment journey with simple instruments like bank FDS or PPF. Now another question that Veer had in his mind was for how long should I remain invested in these. Then I explained to him something

called long-term and short-term investing. Basically, the difference in both these types of investing is of your time period. If you keep an investment for less than 1 year or up to 1 year then it is called short-term investing. Or any investment which you make for a long period of more than 5 or 7

years is called long term investing. Or actually the investing period can also be different for each individual. Generally, in short-term you have short term goals like buying a car or going on a vacation, then you can liquidate your amount, so that is your short term investing. But if you are

thinking of buying a house in the future or planning for your retirement, then those can be your long term investment goals. So this was all about Assets, what are the different types of Assets and from where you can start your investment journey. Now Veer was so

excited, he thought we are going to talk about equities in the next episode. But before we understand equities, we need to understand what is an emergency fund. That will be our lecture on class 3. See you in the next episode, bye-bye.