Investing is a crucial part of financial planning and building wealth, particularly in Pakistan’s dynamic economic environment. Knowing the different types of assets can help you create a diverse portfolio that stands strong against fluctuations. Here, we will explain the basics of major asset classes to help you make smart investment choices.
Cash
Cash is the simplest and most liquid asset, which includes physical currency and deposits in current accounts. Cash itself doesn’t yield any return but provides stability and quick access, making it essential for emergency funds or short-term savings. However, inflation erodes the value of cash. For example, In 2013, PKR 1,000/- could buy around 10 liters of petrol at a price of nearly PKR 97/liter. By 2023, the price of petrol has risen to more than PKR 250/liter and you can buy less than 4 litres of petrol with the same amount of cash.
Real Estate
Real estate involves properties like homes, commercial buildings, industrial spaces, etc. In Pakistan, real estate has remained the most preferred choice of investment for the masses and it has yielded good returns thanks to urbanization and economic growth. Real estate generates return in the form of rental income and capital gains or price appreciation. However, investing in real estate requires substantial capital and is less liquid than other assets. In order to address this issue of large capital requirement, a concept of Real Estate Investment Trust (REIT) exists, which are essentially stocks of real estate projects.
Additionally, Real Estate Investment Trusts (REITs) provide a way to invest in real estate without owning physical properties. For example, Dolmen City REIT, which includes Dolmen Mall, allows investors to own a share of high-value commercial property and earn dividends from rental income of the project, offering a more accessible way to participate in the real estate.
Commodities
Commodities include assets like gold, silver, oil, and agricultural products, such as wheat etc. In Pakistan, gold is a particularly popular commodity investment, often seen as a safe haven. One can invest in commodities through direct purchase, or trade electronically through an exchange. The Pakistan Mercantile Exchange (PMEX) is a platform for trading commodities in Pakistan. The benefit of PMEX is that you do not have to worry about physical ownership of the goods, since one can invest through financial instruments. Returns in commodities are generated solely through capital appreciation; there is no cash flow income involved, like rent or dividend.
Bonds
Bonds are debt securities issued by governments and corporations. In Pakistan, government bonds, such as Pakistan Investment Bonds (PIBs) and Treasury Bills (T-Bills), are most common debt based financial assets. Investing in bonds means you are lending money to the issuer for periodic interest payments and specific maturity, at which date you receive your principal back. Bonds are considered lower risk than stocks and can provide a steady income, making them a vital part of a diversified portfolio, especially for cautious investors.
Stocks
Stocks represent ownership in a company, giving shareholders a share of the company’s profits. The Pakistan Stock Exchange (PSX) is where investors can buy and sell shares of publicly listed companies. Stocks offer significantly higher returns, especially over the long term, but they also carry higher risks compared to other asset classes. Stock prices can be influenced by a company’s performance, market conditions, and economic factors. Diversifying across different sectors and regions can help reduce some risks associated with stock investing.
Conclusion
Knowing the different types of assets is essential for building a strong and diversified portfolio, particularly in Pakistan’s evolving financial landscape. Each asset type has its own benefits and can align with various investment goals and risk tolerance levels. By mixing different assets, you can create a balanced portfolio that maximizes returns while managing risk. For a deeper dive into each asset class, watch our full video on the Finqalab YouTube channel.