Understanding Risk and Return of Various Asset Classes
When it comes to financial planning, one of the most important things to understand is the relationship between risk and return across different asset classes. Every rupee you save or invest has a purpose, and knowing where to put it can make all the difference in achieving your financial goals.
In this blog, we’ll break down the major asset classes, their probable risks, and their returns, using simple examples that everyone can relate to.
What Are Asset Classes?
An asset class is a group of investment options that share similar characteristics. In simple words, it’s a category of investments that behave in the same way in the financial market.
Different asset classes have different levels of risk and return potential. Some are safer but give lower returns, while others are risky but have the potential to generate higher wealth.
Before we dive deeper, you can also read our earlier blog on Saving vs Investment: Understanding the Key Differences to build a strong base on how saving and investing differ.
1. Equity – Ownership in a Company
Equity, or stocks, represent ownership in a company. When you buy a share of a company, you become a part-owner of that company.
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Return: Historically, equities have given 12–15% annualized returns in India over the long term.
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Risk: Equity is volatile. Prices can move up or down based on market conditions, company performance, or global factors.
Example:
If you had invested ₹1,00,000 in the Nifty 50 Index in 2010, by 2025 it would have grown multiple times, despite market ups and downs.
👉 If you are planning to invest in equities, you should also check our guide on SIP vs Lump Sum – Which is Better for 5 Years? as it explains which approach works better for stock market investments.
2. Bonds or Fixed Income
Bonds are like giving a loan to the government or company, where you receive fixed interest in return.
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Return: Typically 5–8% annually depending on type (government bonds, corporate bonds, debentures).
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Risk: Lower than equities, but not risk-free. Risks include credit risk (default by issuer) and interest rate risk (bond value falls if interest rates rise).
👉 For real-life examples, check our blog on Nido Home Finance Limited NCD Issue where we explain how fixed income products like NCDs work.
3. Real Estate
Real estate involves owning physical property, either residential, commercial, or land.
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Return: Real estate can provide rental income (5–7% yearly) and capital appreciation (varies 6–10% annually depending on location).
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Risk: Liquidity risk (selling property takes time), market downturns, legal disputes, and high entry cost.
Example:
Buying a flat for ₹50 lakh in 2015 in a growing city like Bangalore could now be worth ₹80 lakh–₹1 crore. But in less developed areas, the same property may not have appreciated much.
👉 Many investors also combine real estate with equity mutual funds. For better insights, check our detailed blog on How to Build a High Growth Investment Portfolio.
4. Cash & Cash Equivalents
This includes savings account, fixed deposits, money market funds, liquid funds, etc.
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Return: Low, usually 3–6% annually.
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Risk: Almost no risk, highly liquid. But the biggest risk is inflation, which reduces the real value of money.
Example:
Keeping ₹1,00,000 in a savings account for 10 years at 3% interest will not beat inflation if prices rise at 6% yearly.
👉 To beat inflation effectively, investors often use SIPs. You can explore our blog on How to Build a Smart SIP Portfolio Beyond Basics.
5. Commodities
Commodities include gold, silver, oil, agricultural products, etc.
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Return: Gold has historically given 8–10% annual returns in India.
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Risk: Prices are volatile due to global demand & supply, geopolitical tensions, and inflation.
Example:
During COVID-19 in 2020, gold prices shot up as investors moved towards safe-haven assets.
6. Alternative Investments
This is a new-age asset class including cryptocurrencies, digital assets, hedge funds, private equity, startups, and art.
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Return: Potentially very high (cryptos like Bitcoin grew 10x in a few years).
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Risk: Extremely high. Prices depend on sentiment, regulation, and demand.
Example:
Bitcoin rose from less than $1,000 in 2017 to over $60,000 in 2021, but then crashed below $20,000 in 2022.
👉 Curious about how traditional investments compare? Check out NPS vs Mutual Fund with SWP – Which is Better? for a detailed breakdown.
Risk vs Return Summary Table
| Asset Class | Expected Returns (per year) | Risk Level | Liquidity | Example |
|---|---|---|---|---|
| Equity | 12–15% (long-term) | High | High (stocks can be sold quickly) | Nifty 50 shares |
| Bonds / Fixed Income | 5–8% | Low to Medium | Medium | NCDs, Govt. Bonds |
| Real Estate | 6–10% + rental income | Medium to High | Low | Residential Flat |
| Cash & Equivalents | 3–6% | Very Low | Very High | Savings A/c, FD |
| Commodities | 8–10% (gold long-term) | Medium to High | High | Gold |
| Alternative Investments | Highly Variable (0–100%+) | Very High | Varies | Bitcoin, Startups |
How to Choose the Right Asset Class?
Your choice depends on:
✅ Financial goals (short-term or long-term)
✅ Risk appetite (conservative or aggressive)
✅ Liquidity needs (how quickly you may need money)
✅ Age & income stability
👉 A smart investor always builds a diversified portfolio combining different asset classes. For example, equities for growth, bonds for stability, gold for safety, and cash for emergencies.
If you are interested in practical strategies, don’t miss our blog on How to Build a High Growth Investment Portfolio which goes deeper into portfolio diversification.
Final Thoughts
Understanding the probable risk and return of various asset classes is the foundation of financial planning. Instead of chasing only high returns, balance your portfolio with safety, growth, and liquidity.
For beginners, starting with a mix of mutual funds, fixed deposits, and gold is a safe way to enter the world of investments.
Disclaimer
This blog is for educational purposes only and does not constitute financial advice. Investment in markets is subject to risk, and readers are advised to consult a certified financial advisor before making investment decisions.
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