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Five Types of Assets to Create Wealth in Long Term- Financial Assets(Part 2)

In the last part, I have covered about physical assets which involve Real Estates, Commodities, and Collectibles. If you haven’t read that click this link to read it here https://www.mintpaisa.com/assets-you-should-be-aware-of-to-create-wealth/. Now let us move on to the Financial Assets.

What is Financial Asset?

Financial Asset is an intangible asset which has liquidity. Its value is defined by the contractual claim between the investor and borrower. Liquidity defines how quickly an asset can be sold or bought in the market. Assets like stocks have good liquidity in the secondary market like the stock market. Example of a financial asset is capital market products which include equity and debt.

Equity and Debt in Easy Language

Let us say you have a company whose value is 200 crores. You wanted to expand the company. For that, you want 100 crores. After proper valuation, you decided to collect that amount in the form of investment and debt. So you allocated 50% for investors and 50% for debt.

During the investment roundup, 5 people invested 10 crores each. The remaining 50 crores were collected from the bank in the form of debt at an interest of 10% per annum.

The main difference between an investor and the lender who gives money for debt is that the investors have ownership rights over the company while debt lenders can’t claim ownership rights.

That means in the initial stage, 5 investors gave 10 crores each. After a couple of years if the value spiked to 200 crores then each investor get 20 crores each. But it is not the case with the bank. Since the bank gave for money in the form of debt, it will only get interest amount as agreed before.

The investor has to bear more risk when compared to debt lender. The main reason is, since the investor is the owner, in case of bankruptcy he will loose all the money. But it is different for the one who gave money in the form of debt. In Bankruptcy case debt lenders have all the rights over the company assets. They can auction assets to collect their money back.

Why it is Important to Know about financial assets?

If you are unaware of these assets then you stick the old age form saving schemes like Fixed investments, Recurring Deposits, etc. Wealth creation with the interests given from the bank is just a big joke. Because those interest can’t even beat inflation then how can you think about creating wealth.

But this is not the case with these assets.Whether they are physical assets or financial assets they have the capacity to create wealth depending on how best you can use them.

How to Invest in Equity and Debt?

If one wants to invest in equity, then they can buy the shares in the public listed companies through the stock market. There are more than 1300 companies in the Indian Stock Market. If you don’t have knowledge about investing then you can approach Mutual Funds where your money will be handled by a Fund Manager.

But before investing through any mutual fund the investor should make decent research about the fund manager and his past background. Because, How can give your hard earned money to a guy without knowing his past performance.

Not only that you have to be completely aware of in which type of mutual fund you are investing. Some will be close-ended and others are open-ended. I will make a separate article on this explaining in depth about types of mutual funds.

If you want to invest in debt, you can do this by buying government debt bonds, Treasury bills or investing money in debt mutual fund schemes. These debt schemes can give you a fixed amount of interest for a fixed maturity period.

Many people diversify their funds between gold, stocks and debt bonds. If something bad happens in one security then he can expect the other to balance this loss.

Conclusion

  • Equity assets like stocks give you rights of ownership in the company.
  • Debt assets like government bonds, corporate bonds or treasury bills pay you interest on the amount invested but do not provide ownership rights.
  • You can invest in equity in equity and debt directly or through mutual funds.
  • Financial assets have the capacity to compound your money which helps in wealth creation.
  • They can beat inflation easily and increase your invested money value in the future.

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