Everyone equates assets with wealth. Your daily sense of financial security and comfort is determined by your capacity to spend on necessities and luxuries. Everybody needs money to spend, therefore their assets must help meet that demand and be practical for their daily lives.
When the productivity of the human asset declines and other assets constructed with saved money can take its place, you retire. Investing in financial assets ensures a safer retirement plan and a stress-free early retirement age. So, financial assets are the need of the hour.
Meaning of Financial Assets
Financial Assets are intangible assets, meaning they cannot be touched or felt. They are liquid assets, and the contractual claims serve as the basis for their values. A contract is signed between two parties providing:
“One entity that invests its capital will have a contractual right to receive returns from another company in the form of dividends, interest, etc. from the former.”
Financial assets do not always have an intrinsic physical value or even a physical form, unlike real estate, or commodities. Instead, the market conditions in which they trade and the level of risk they involve are what determine their worth.
They are, usually, easy to convert into real money.
Important Traits of Financial Assets that separate them from Real Assets:
- It is a contract between two parties, i.e., investor and FI, corporate or Govt
- The two parties can consist of people, businesses, or even the government
- Financial asset grants the investor a right to obtain the financial benefit from the party in which the money was invested
- Financial assets facilitate the movement of money. They move money from those who have extra money to those who need it for further financial activity.
- Financial assets are a safe option or claim of having future cash.
- Bonds, fixed deposits, derivatives, equity shares and insurance contracts are a few types of financial assets.
Different Types of Financial Assets in India
Financial assets, around the world, help channel money into investments and financial activities. In India, there are the following types of financial assets:
a) Cash/Saving Bank Account
It refers to the company's highly liquid current assets, such as cash on hand, the balance in its bank accounts, checks from customers that have not yet been cashed by the bank, commercial paper, etc.
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b) Retirement Savings Accounts
Retirement savings like EPF and NPS are long-term financial assets. These assets are meant and built over a long time to financially secure your retired life. These are also perhaps the second most important financial asset in your life.
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These funds can either come in handy during emergencies or retirement.
The value of stocks fluctuates over time depending on the company's success. They are fractional ownership interests that may yield dividends. Stocks are perpetual. Stockholders are the individuals who own these stocks. You can purchase a certain stock of a company and be an owner of the corresponding part of it.
Bonds are fixed-income securities, which reflect loans from investors to borrowers (typically corporate or governmental). A bond is an agreement between a borrower and investor which outlines the terms of the loan and the associated payments.
Companies, states, municipalities and sovereign governments make use of bonds for financing initiatives and operations. Bondholders are the issuer's debtors or creditors.
e) Life Insurance
Life insurance is a long-term financial asset. You can use various types of life insurance contracts to meet different financial goals. For example:
i) Term Insurance Plan:Long-term financial safety for dependents and family
ii) Savings Plans:Safe long-term investments for wealth preservation from inflation and taxes
iii) Unit Linked Insurance Plans (ULIPs):Grow your savings aggressively or safely with market-linked portfolio investments. Best for saving for important financial goals such as a child’s education, marriage, self-retirement
iv) Pension Plans:Turn your financial wealth into a reliable stream of regular lifetime income
v) Whole Life Insurance Plans:Secure loved ones while you are employed and leave a legacy for the next generation
ULIP Plans like Invest 4G from Canara HSBC Life Insurance are comparable to retirement investment plans like NPS. You can stay invested in this plan for up to 99 years of age. Thus, building your retirement corpus up to the age of 60 and then drawing a tax-free pension from the same plan.
f) Fixed Deposits
A Fixed deposit is a sum that businesses place with other organizations in the hopes of receiving interest payments in return for their deposits. You deposit a large sum into a fixed deposit with your bank for a set period at an agreed-upon rate of interest. You receive the amount you invested plus compound interest at the end of the term.
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Debentures grant their holders the right to collect interest on the money they have invested at a certain rate and on defined due dates. The sum invested is also returned to the debenture holders at the time of maturity, and debenture holders have the right to claim the assets of the issuing firm before preference shareholders and equity shareholders do when the issuing company is wound up.
h) Mutual Funds
A mutual fund is portfolio investment. Mutual funds pool funds from a large number of investors and invest in securities, like equity stocks, bonds, etc. to generate returns. The investors get rewarded with returns in proportion to their invested amounts.
i) Equity Mutual Funds
ii) Debt Mutual Funds
iii) Hybrid Mutual Funds
iv) Equity Linked Savings Schemes (ELSS) for tax saving under section 80C
Mutual funds are flexible financial assets where you can build your wealth by investing a small amount regularly.
Features of Financial Assets
Financial assets are important in life as you can earn small amounts of money regularly by investing your time and effort. The small regular amounts may not be enough to buy a real asset.
Here are the salient features of a financial asset which make them an attractive proposition:
- No physical existence
The ownership is represented only through a piece of paper. So, the transactions are easier.
- No production capacity
These assets generate income through investment in real assets. They cannot have a production capacity of their own.
- Easily movable
The transferable ownership certificates are easily movable from one place to another.
- High liquidity
You can easily convert any financial asset into cash. It is an extremely fast and easy procedure
- Higher returns
The financial assets will generate more income for your capital than investing the same in a mere savings account.
Why should you Build Financial Assets?
Your small income pooled over time in financial assets can become large enough to allow a passive income which can replace your actual income. This characteristic of financial assets to preserve and grow wealth makes them important in life:
- Pool money as per your risk appetite and financial goals
- Power of compounding as your earned interest starts to earn more interest
- Grow your wealth faster than the inflation
- Save income tax every year
- Meet your important life goals, such as home purchase, retirement, a child’s higher education, etc.
- Ensure the financial safety of your family with financial assets like term insurance and health insurance
- Secure your post-retirement life from financial hardships
- Leave a legacy for your next generation
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Financial Assets as Ladder to Real Assets
Financial assets are critical for your wealth growth. If you are salaried, financial assets can help you build a fortune over time. When you are self-employed, financial assets will help you safeguard your family from business risks.
Financial assets like life and health insurance are important for people from all walks of life. They can help you safeguard your loved one’s future from unforeseen events including the loss of your life. Adequately large financial assets will even help you build real assets that aid in your passive income or wealth growth.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.