Under financial assets, a contract occurs between two entities where one entity that invests the money is liable for returns as per the contract in the form of dividends, interest, etc., from the other entity where the former has invested money. Financial assets are a form of intangible financial instruments that have a highly liquid nature as compared to other assets.
Many different investment plans come under financial assets, including cash and its equivalents, equity shares, fixed deposits, debentures, life insurance policies, etc. Having financial assets is one of the most important parts of your financial planning and thus has to be carefully planned.
Read on to find out more information about different types of financial assets.
List of Financial Asset Types
Here are the different types of financial assets:
Cash and its Equivalents
Cash and its equivalents include cash, money in the bank account, and cheques. These are short-term financial assets that can be easily converted into cash. Cash equivalents are financial assets that are highly liquid and generate income in the short term. Money market funds2, marketable securities, etc., are highly liquid financial assets.
Fixed Deposits
Fixed deposits are a sum of money maintained by a financial institution. It is a common way of preserving your financial assets safely and earning an interest. The percentage of interest may vary from one financial institution to another.
For example, if a person deposits ₹1 lakh at an annual simple interest rate of 8% for a year, the person will receive ₹1.08 lakh after one year. It is a less risky investment plan and keeps your corpus safe.
Equity Shares
When you invest in an equity share, it means that you own a part of the company that you have invested in. Equity shares are financial asset types that give you the right to vote, receive dividends, receive capital appreciation of your stocks, etc. By holding equity shares of a company, you are liable to bear the losses and profits of the company. Thus, these can be risky investments; you must research and then invest in them.
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Bonds or debentures are financial instruments issued by a company to raise funds as debt for short-term and long-term projects. The holders receive interest on the invested amount, and the principal amount is repaid on maturity.
Unlike dividends paid on equity shares, the interest payment on debentures is mandatory even if the company suffers losses. In the case of the liquidation of the company, the debenture and bondholders get preference over preference and equity shareholders.
Preference Shares
Preference shares give the investors the right to get dividends, but they do not get any voting rights. Like bond and debenture holders, they receive a fixed percentage of dividends irrespective of whether the company gains profit or incurs losses. At the time of liquidation, the preference shareholders get preference over equity shareholders.
Mutual Funds
In the case of mutual funds, money is collected from smaller investors and the collected money is invested in the financial markets, which include debt, equity, and commodity markets. The mutual fund investor receives some units according to the invested amount.
These units are purchased and sold in the financial market on the basis of the market price. The ROI is the sum of the income generated on the original invested amount and the capital appreciation. A few charges may be deducted here, which differ for various fund houses.
However, if the value of the units diminishes, the investor will incur losses. Thus, it is an investment plan under which you may earn profits and incur losses.
Life Insurance
Life insurance policies are also contracts under which the insurer accepts an insurance risk and agrees to compensate the insured if a specific event covered in the policy occurs.
The value of an insurance contract is calculated based on the amount of risk it covers. Additionally, some life insurance policies pay the insured a specified amount on the maturity date. In such cases, life insurance policies act like financial assets when they mature. The policyholder received the maturity amount they can utilise for their financial requirements.
Derivatives
These are a type of contracts that derive their value from the underlying assets that are used for speculation, hedging, etc. However, these are different from debentures in the sense that there is no repayment of the principal amount or accrual of investment income under this investment plan. Some of the common derivatives are futures, options, etc.
Lease Agreements
Under a lease agreement, one party agrees to let the other party make use of their property in exchange for a specific payment amount made periodically. The amount you receive is a financial asset as it helps one party generate income from the assets leased to the other party.
Conclusion
Having an investment plan is essential so that you can have alternative sources of income. You can invest in a diversified group of financial assets so that you can get reasonable returns on your investments. While you invest, ensure that you read the terms and conditions of the financial instrument carefully. You can also consult an expert to help you make and execute your investment plan.
