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Asset classes explained

Education HUB article

7 minute read

What are asset classes?

Asset classes refer to the different categories that investments with similar features can be grouped into. Becoming familiar with asset classes can help you to further understand what to expect from the various investment options available to you. 

There are many ways to invest. And every investment decision can result in different timeframes, degrees of risk, and financial objectives.

Whatever strategy you choose, all investments can be categorised into asset classes. Broadly, there are two types of asset classes, income and growth.

Income assets

Cash, bonds, and mortgage securities are considered income assets. They typically deliver returns in the form of income, meaning they pay regular income or interest payments to you.

Because income assets are considered to be low risk, they’re generally more stable and may feature:

  • Lower returns than growth assets
  • Less fluctuation in returns over the short-term when compared with growth assets

Growth assets

Shares and property are classified as growth assets. Over time they typically provide returns in the form of capital growth.

Growth assets are often considered higher in risk and may feature:

  • Capital growth over the long-term with some income
  • Generally, fluctuating returns over the short-term. However, they tend to level out over the long-term
  • Higher returns compared to other asset classes, due to their higher-risk profile.

A closer look at asset classes

The five main asset classes are:

Cash

Includes bank accounts and term deposits and may include higher interest paying securities. Generally, cash provides a regular income stream and is the lowest risk of all asset classes.

Fixed interest (bonds)

Bonds have low to medium risk and provide a reliable income stream. They also have the potential for some capital growth.

Bonds are issued by a corporation, bank, or government body in return for cash. Usually, bonds are well-suited for short to medium-term investors. For the most part, they offer a higher return than cash investments.

Mortgage securities

Generally, mortgage securities have a low-to-medium risk and provide a reliable income stream. They usually offer a higher return than cash investments.

Australian and international shares

Shares can potentially achieve greater returns and capital growth compared to other assets. However, they are higher in risk than income assets. Shares are usually best suited for long-term investors.

Property

Includes residential property, property trusts, and other securities across residential, commercial, retail, and industrial property investments. Returns may include regular income and capital growth.

Generally, property represents a lower risk growth asset than shares but are riskier than cash and bonds. Property is suited for medium to long-term investors.

How asset classes work together

Usually, a managed fund will be made up of a combination of income and growth assets. How this mix of income and growth assets is structured will depend on the investment style of the investor.

For example, a conservative style of managed fund will consist of more income assets than growth assets. Whereas a growth style will likely feature less income assets and more growth assets.

What’s right for you?

Choosing the appropriate investment options is crucial for any investor. And it’s important to remember that what is right for one person, may not be appropriate for someone else.

To learn what might suit you, check out our investment style selector.

For more helpful articles, visit the Education HUB

Ready to invest? Check out our range of Managed Funds.

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Things you should know

Sandhurst Trustees

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