Asset class that can give you best returns

When it comes to having things in life, we choose to have best of them. We purchase branded clothes even though the same kind of a thing is sold by a not so known brand. The same goes with investments. People want to invest in such an asset class that gives best returns. So, which is the asset class that can give you best returns? Let’s find out.

When you ask yourself or probably your financial advisor the same question about the asset class giving best returns, most of the time the answer has to be equity. Some may say stocks and others may say equity mutual funds. But, what is the definition of best? Best means something that gives highest degree to something that is good on a consistent basis. So, now give it a thought. Do the stocks or equity mutual funds give the best returns on consistent basis? Some hands would go up in favor and some may not.

Here we need to understand that there is nothing called as best when it comes to investment. So, it is advisable not to follow what is best as it may lead to non-desirable results; rather follow what is optimal, that will help you to get optimal returns depending upon your risk level. Now, what is optimal? Optimal is something wherein you have a right mix of assets based on your risk tolerance level that will help you to achieve your objectives.

So, rather than following the best asset class, diversify your portfolio among different asset classes. It is a fact that no asset class always remains the best. The best asset class title always rotates among different options, depending upon the external conditions. Let us understand this with the help of an example. Say, you have an investment time horizon of 2 years. Where you will invest – equities or debt or gold or real estate? Equities are volatile in short run so investing in them would be risky; on the other hand, gold is kind of a hedging tool rather than an investment tool and has some liquidity issues as well, while, real estate is illiquid in nature. For the said time horizon, you should invest in debt as debt is volatile in long term and not in short term. So, if you want returns in short run, you may either invest in bank FDs (Fixed Deposits) or debt mutual funds. Even while investing in debt mutual funds you need to check its Macaulay duration or average maturity period. It makes no sense to invest in a fund for 2 years having average maturity of 3 years or 5 years or more.

Setting financial goals and aligning your investments with them is the best practice. This will help you to be disciplined and also would help you to build confidence in the field of investing. Also, this will help you to avoid any behavioral biases.