Types of Asset: A Detailed Overview of Asset Classes
- Bhavika Rajput
- 7 hours ago
- 7 min read
All investments fall into one of the asset classes. Knowing which asset class your money is going to when you invest is crucial. The asset class classification has undoubtedly made finance easier for investors to understand. A resource that is held or controlled by a person, business, or government with the expectation of a favourable economic outcome is called an asset. A company's ability to survive depends on its ability to accurately identify and categorise its various asset kinds, particularly its solvency and related risks.
Table of Contents
What is an Asset?
An asset is a resource that the business owns and from which it anticipates receiving future financial benefits. Here are a few examples of assets:
Investments
Cash and cash equivalents
Patents (intangible asset)
Inventory
Accounts Receivable
PPE (Property, Plant, and Equipment)
Vehicles
Furniture
What is an Asset Class?
A group of securities with similar characteristics and experience comparable market movements is referred to as an asset class. Securities in a single asset class are mostly always bound by similar legalities. To assist clients in rapidly diversifying their portfolios, experts place a variety of investment tools across different asset classes. Different asset classes have different risk considerations, taxes, return rates, liquidity, tenures, and market volatility. As a result, investors frequently depend on asset category diversification in order to maximise returns while minimising expenses. The categories are:
Convertibility: The ability of an asset to be easily turned into currency.
Physical Existence: Dividing assets into tangible and immaterial categories according to their physical presence.
Usage: Grouping assets according to their function or use in company operations
Types of Assets Based on Convertibility
Assets are divided into two categories based on whether their convertibility into cash determines their classification: current assets and fixed assets.
Current Assets
Assets classified as current are those that can be quickly turned into cash and cash equivalents, usually within a year. Examples of current assets, often known as liquid assets, include cash, cash equivalents, inventory, short-term deposits, accounts receivable, marketable securities, and office supplies.
Fixed or Non-Current Assets
Assets that are not easily and quickly convertible into cash and cash equivalents are known as non-current assets. Fixed assets, long-term assets, or hard assets are other names for non-current assets. Non-current or fixed assets include, for example, land, buildings, equipment, machinery, patents, and trademarks.
Types of Assets Based on Physical Existence
Assets are divided into two categories if their physical existence is taken into consideration: tangible assets and intangible assets.
Tangible Assets
Assets that are physically present, that is, that we can touch, feel, and see, are known as tangible assets. Tangible assets include, for example, land, buildings, equipment, machinery, cash, inventory, office supplies, and marketable securities.
Intangible Assets
The assets without a physical existence are intangible assets. These include patents, goodwill, copyrights, brand, trademarks, trade secrets, permits, licences, and corporate intellectual property.
Types of Assets Based on Usage
Assets can be categorised as either operational or non-operating depending on how they are used or intended to be used.
Operating Assets
Assets needed for a business's day-to-day operations are known as operating assets. Stated differently, a company's fundamental business activities produce revenue through the usage of operating assets. Operating assets include, for example, cash, buildings, inventory, accounts receivable, equipment, machinery, patents, goodwill, and copyrights.
Non-Operating Assets
Assets that can still produce income but are not necessary for day-to-day business operations are known as non-operating assets. Non-operating assets include, for example, vacant land, short-term investments, marketable securities, and interest income from a fixed deposit.
Asset Classes from a Taxation Perspective
Fixed Income
The fixed income asset class is one of the oldest and most reliable investing options, and it is also the most popular among Indians. Fixed deposits and public provident funds (PPF) are two instances. But is this, anyway, an investment? Simply said, you are granting the bank a loan with the following terms: liquidity, returns in the form of pre-arranged returns, and capital protection. You won't lose your investment because these assets have no risks. Additionally, you receive consistent returns as agreed upon when you made the investment. Fixed income plans may yield yields of 7% to 8%, but they won't beat inflation. Fixed income plans, which are subject to STCG or LTCG depending on the term, merely provide security; they do not promote wealth accumulation.
Real Estate
As the name suggests, the real estate asset class focuses on commercial buildings, villas, flats, plots, and industrial regions. Interest in real estate investments has increased in the new millennium, which has been made worse by the introduction of the Pradhan Mantri Awas Yojana initiative. This is not limited to metropolitan environments; it also occurs in semi-urban and rural places. The returns are determined by a variety of elements, including project progress, socio-political settings, and municipal planning, and the real estate market can be rather unexpected.
Equity
One interesting asset class that has grown in prominence recently is equities. Purchasing shares of a company gives you a portion of the ownership; therefore, investing in equity is essentially purchasing into a corporation. The only drawback is that there is some risk involved. Every business needs time to expand, and the share price may be impacted by changes in the market. The Equity Linked Savings Scheme (ELSS) is the only wealth-building and tax-saving plan among equity investments with a three-year lock-in period (under section 80-C). However, since equity investments—including ELSS—have historically produced returns of 16%–18% and have increased above inflation, they are a good choice for long-term investments.
Cash and Cash Equivalents
Money market instruments are another name for these. It is not limited to cash; it can also include unused funds from savings accounts or other liquid plans. Cash offers greater transactional freedom than anything else. Many people are hesitant to put money into savings accounts because they don't trust any investing plans or believe that they may utilise the money whenever they want. It is unable to outperform inflation, though, and the returns are also very small—no more than 4%. Since cash is untraceable, people frequently stash it away to avoid paying taxes.
Commodities
Anything that may be traded for various purposes, such as products, properties, or goods, might be considered a commodity. Commodities under the asset class include things like gold, silver, bronze, food crops, petroleum, etc., and each has its own market undercurrents. Depending on demand, the price may increase or decrease. Unless they are gold or silver, merchandise is not intended for long-term investments. Simply purchase when prices are low and sell when they rise.
Derivatives
A financial security whose value is contingent upon the underlying asset or collection of assets is referred to as a derivative. The derivative's price is influenced by changes in the price of the underlying asset; it has no intrinsic worth. It is a type of agreement in which two or more parties have the right and duty to carry out their end of the bargain. Equity shares, bonds, debt, commodities, foreign exchange, market indexes, and interest rates are examples of frequently utilised underlying assets.
Alternative Investments
An alternative investment pertains to a distinct asset class that is distinct from the conventional asset types of debt, equity, and cash. Because of its intricate structure and lax rules, these are primarily owned by high-net-worth individuals or institutional investors. These are extremely hazardous and illiquid, but they also aim to produce extraordinarily large profits. The capital markets offer a variety of alternative investments, including structured goods, bitcoin, hedge funds, and artwork.
Importance of Asset Classification
Asset classification is crucial for a firm. For instance, knowing which assets are fixed and which are current is crucial to figuring out a company's net working capital. Knowing which assets are tangible and intangible aids in evaluating a company's risk and solvency in a high-risk industry. Understanding the contribution of revenue from each asset and figuring out what proportion of a company's revenue comes from its main business operations depends on knowing which assets are operational and which are non-operating.
Importance of Asset Diversification
Building a profitable and well-balanced portfolio is facilitated by having a fundamental understanding of the different asset types that are accessible for investing. The performance of a diversified portfolio is unaffected by the poor performance of any one asset class since it is made up of various asset classes that lower overall risk. By distributing your money throughout several asset classes, diversification helps to lower the non-systematic or firm-related risk of your investment portfolio.
It occurs when there is either no correlation or a negative correlation between the asset classes in the portfolio. The direction that two asset classes are taking at any given time is indicated by their correlation. When the price of one asset class declines, the price of another asset class increases, indicating a negative connection. This type of behaviour is seen between fixed income and equity, particularly when the market is down.
Conclusion
Every investor must understand the basics of assets, their types, classification, and diversification to establish a robust investment portfolio. The primary concept is to reduce total losses and maintain portfolio returns consistent with your expectations. It teaches you to spread your investments among several asset classes rather than concentrating them all in one. The issue of asset allocation is addressed by the proportion of money that ought to be allocated to each asset class.
Frequently Asked Questions
What is an asset and examples?
In simple words, an asset is anything valuable or useful. Cash, savings accounts, bonds, life insurance, jewellery, and collectibles are among the personal assets that the majority of people own. Additionally, a person's abilities and skills might be a benefit.
What are the types of assets in accounting?
Current assets, fixed assets, physical assets, intangible assets, operational assets, and non-operating assets are the six categories that are typically included when discussing assets in accounting.
What are the main classifications of assets?
Even if you're not familiar with the phrase, your portfolio probably includes assets from all four of the major asset classes: cash, fixed income, stocks, and real estate.
Is cash an asset?
According to financial accounting, an asset is any resource that a company or other economic organisation owns or controls. It is anything that has the potential to provide positive economic value, whether it be tangible or intangible. Although cash is considered an asset, assets are the value of ownership turned into cash.
Is land an asset?
Since land is a fixed asset, its anticipated use should last longer than a year. Land should not be categorised as a current asset since assets current assets classification are anticipated they be liquidated within a year, which may not happen in case of land.
Is inventory an asset?
Almost always an asset, inventory is usually regarded as a current asset by firms. Products and materials that employees sell or use within a year after the product's creation or the acquisition of supplies are included in the inventory that your company keeps as current assets.
What are assets and liabilities examples?
Everything that your business owns, such as money, machinery, supplies, and investments, is an asset. Liabilities are the things that your business owes other people, such loans, mortgages, etc.
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