Asset Classes: What Are They and Why do They Matter to You

Equities represent ownership shares issued by publicly-traded companies and are traded on stock exchanges like NYSE or NASDAQ. Investing in stocks can provide potential profits through share price appreciation or dividends.

Stocks also allow you to become shareholders and participate in the growth and success of companies. When you buy stocks, you essentially own a portion of the company, and have a claim on its assets and earnings.

In general, stocks can be classified into three different categories based on the market capitalisation of the companies: 

• Small-cap stocks: Shares of smaller companies with a market capitalisation generally below $2 billion.
   
• Mid-cap stocks: shares of medium-sized companies with a market capitalisation between $2 billion and $10 billion.
   
• Large-cap stocks: Shares of large companies with a market capitalisation exceeding $10 billion

1. Bonds

Bonds are generally considered less risky compared to equities and other asset classes. This type provides a fixed income stream over a specific period, making it attractive to conservative investors seeking stable returns.

Bonds are rated by credit rating agencies based on the issuer's creditworthiness. Higher-rated bonds are considered less risky, while lower-rated bonds carry higher risks while simultaneously offering potentially higher yields.

Looking to get started? Get in touch with us! Head on over to our Bond Investment 101 article to learn more about bonds, and perhaps you’ll start your journey today by contacting your relationship manager or by visiting any CIMB bank branches.

2. Fixed-income Investment

Fixed-income investments involve debt securities that generate returns in the form of interest.

When you invest in bonds, you essentially lend money to the issuer, which can be a government entity, municipality, or corporation. In return, you receive periodic interest payments and the return of the principal amount at maturity.

This asset class is where the Employee’s Provision Fund (EPF) falls under. EPF is a scheme that holds significant importance in promoting financial security for individuals.

Employers and employees both contribute a portion of their salaries to the EPF, which is then invested for retirement planning. The scheme ensures a safety net and long-term stability during retirement, offering additional benefits for housing, education, and medical expenses. 

Cash or cash equivalents offer high liquidity, meaning you can easily access your funds whenever needed. Cash equivalents are highly liquid investments that can be quickly converted into cash, such as money market funds or short-term government bonds.

Money market funds invest in short-term debt securities with low risk and provide stability of principal. This type of instrument is a cash equivalent that offers a slightly higher return compared to traditional savings accounts.

Cash and cash equivalents are often used as a safe haven or emergency fund, providing stability and readily available funds for unexpected expenses or immediate investment opportunities.

Usually, these funds are regulated by the Securities Commission Malaysia and offer individuals and institutional investors the opportunity to invest in a diversified portfolio of money market instruments.

Here are some examples of money market instruments commonly found in Malaysia:
 

• Malaysian Government Investment Issue (MGII): MGII is a short-term debt instrument issued by the Malaysian government.
  
  
• Bank Negara Malaysia Treasury Bills (BNM T-Bills): These are short-term debt securities issued by Bank Negara Malaysia, the central bank of Malaysia.
  
  
• Negotiable Instruments of Deposit (NID): NIDs are short-term debt instruments issued by banks in Malaysia.
  
  
• Commercial Papers: Commercial papers issued by reputable corporations and financial institutions in Malaysia are another common money market instrument.
  
  
• Islamic Money Market Instruments: Malaysia has a vibrant Islamic finance industry, and there are also Shahriah-compliant money market instruments available. 

Real estate and physical assets serve as an asset class that acts as a hedge against inflation.

Unlike purely financial instruments, real estate and tangible assets have a physical presence. Investing in real estate can provide income through rental properties or profit through property appreciation.

Real estate can be a long-term investment that provides both cash flow and potential capital appreciation.

Tangible assets, such as commodities or natural resources, also fall under this category. Investments in real estate or tangible assets offer diversification benefits by having a low correlation with traditional financial markets.

This category encompasses various financial instruments such as futures contracts, spot and forward foreign exchange, options, and an expanding range of derivatives. Derivatives are instruments derived from underlying assets, such as stock options derived from stocks.

Forex (foreign exchange) involves trading different currencies against each other, while futures contracts are agreements to buy or sell an asset at a predetermined price and future date.

Derivatives are often used for hedging, speculation, or gaining exposure to specific assets or markets. Forex, futures, and derivatives can be more complex and carry higher risks compared to other asset classes.