Webster dictionary defines Investment as “the outlay of money usually for income or profit.”
In the quest for income/profit, investor has uncovered various forms of investments, from gold to oil, from currency to bonds, from art to vintage items, from real estate to shares. More recent investment options include casino chips, REITS, and Cryptocurrency. The wide range of investment options could be categorised into two broad asset classes,
- Growth Assets and
- Defensive Assets
These assets are classified as growth assets because of their ability to grow the invested value over the holding period. The investors’ emphasis is on the capital growth of the investment. The underlying reasons for the growth in value are attributed to both fundamental and speculative reasons. Fundamental reasons like the assets ability to increase its future cash flows, increase in value due to the scarcity of the asset class driven by demand-supply dynamics. The growth assets are expected to provide most of the future returns in the form of capital appreciation vs. income
Due to the high volatile nature of the value drivers like cash flow or demand for the asset and its products. Also, the value driven by demand-supply dynamics are to a larger extent dependent on the opinion of the players in the market, and due to these reasons, the growth asset class is volatile in its returns.
The returns from growth asset class are higher as compared to defensive assets class, but the probability of the loss of capital is relatively high too.
Examples of growth assets are shares of companies, real estate investments, paintings, cryptocurrency, etc.
These assets are categorised as defensive assets because these assets provide higher security of safety of conservation of the invested value. The emphasis is on the ability of the asset to provide constant predetermined income stream to the investor. The speculative component in a defensive asset class value driver is relatively low as compared to the growth asset class. The defensive asset classes are expected to provide most of the future returns in the form of regular income vs. capital appreciation.
Due to the less speculative nature and more predictable nature of the defensive assets the return profile of a defensive asset is less volatile. The loss of invested capital is relatively lower; however, it is, not zero.
Examples of defensive asset classes are money in bank deposits, money in short term money market securities, government bonds, debentures, etc.
The growth and defensive asset classes draw different nature of investors; the growth asset class attracts investors and traders who are willing to withstand more volatile returns and are more focused on capital appreciation vs. capital preservation. Hence, we find participation from Mutual funds, Hedge funds, retail investors, venture capitals.
The defensive asset class draws investors and traders who are focused more on capital preservation than capital appreciation. These investors are less willing to withstand volatility. Hence, we find participation from government agencies, insurance agencies, the central banks, private and public owned banks, conservative investors etc in defensive asset classes.
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