The Asset Classes That Can Make Up an Investment Portfolio

byJeff Cuellar

Jan 01, 2024
8 mins

When it comes to investing your hard-earned income, there’s no shortage of viable options to park your money. If you’re relatively new to investing and want to learn more about the different types of asset classes available to build your portfolio with — then this is the article for you.

Asset Classes, Risk Appetite and Diversification

In general, an asset class is a group of securities that have similar investment characteristics such as the level of risk and performance in different market conditions.

We’ll get into the different types of asset classes in a bit — but first, let’s briefly cover risk appetite and diversification, as they will have a direct impact on what type of investment portfolio you can build.

Risk Appetite

Risk Appetite is the amount of risk you are willing to take in order to achieve your investment goals. Generally, investments that can provide higher returns are riskier — while lower risk investments typically provide lower returns.

Your risk appetite is a bit like your “heat” tolerance when it comes to adding chilli padi to your food. For instance, a person who suffers from heartburn is only comfortable adding a little chilli padi to taste. On the other hand, someone who loves chilli padi will probably be more willing to take the risk of spiciness and add quite a bit of chili padi to his or her food.

A person’s risk appetite is tied to a variety of factors such as life stage, time horizon, income, savings, and expenses. Everyone has different levels of risk they are able to stomach. According to financial experts, people closer to retirement tend to have a lower risk appetite than young people in their 20s and 30s who are beginning to plan for retirement and have at least 20 working years ahead of them.

Diversification

Diversification is an investment technique that manages the risk of an investment portfolio by making investments in multiple asset classes in multiple industries and/or categories. This goal is to create a portfolio that balances your risk appetite with your investment goals.

Let’s apply diversification to a delicious plate of chicken rice. An investment of $5.00 in a plate of chicken rice can be broken down into three “assets” — chicken, rice and chilli sauce. However, everyone has their own preferences as to what proportion makes up a “balanced” chicken rice dish. Some people may request less rice if they are cutting carbs, while others may add a larger proportion of chilli sauce to the dish if they can handle the “heat”. A diversified portfolio that’s “balanced” for one person may not be for another person — again, “balance” depends on a person’s risk appetite and investment goals.

Note: Don’t worry about feeling “late” to the investment game — check out our article on how to retire if you start planning in your 40s.

What Asset Classes Can You Use to Create an Investment Portfolio?

Asset classes are generally comprised of three main components — cash and cash equivalents, fixed income and equities.

Of course, everyone has his or her own “flavour” preferences. Investing is no different, as diversification and risk appetite will impact the “flavour profile” of the portfolio — which includes a variable mix of the following asset classes:

Asset Class: Cash and Cash Equivalents

Cash and cash equivalents can provide your portfolio with liquidity, stability and some inflation protection (read our article on the fear of getting older to see how dangerous inflation can be).

In general, this asset class includes the following:

Savings Accounts: includes accounts that pay interest based on your deposit amount (e.g. 1% per annum on the first $10,000 in your account and 1.5% per annum on the next $20,000, etc.)
Fixed Deposit Accounts (FDs): accounts that pay a fixed interest rate based on deposits made for a specific period of time (e.g. 1.2% per annum over a 24-month period for a deposit of $10,000)

Pros: This asset class is stable and secure, as the amount invested will not fluctuate much. It is also liquid and provides some protection against inflation (depending on the interest rate earned).

Cons: While safe, cash will not generate high returns as the interest rates are often at or below the annual rate of inflation, which is around 2%.

Asset Class: Fixed Income

Fixed income assets can include investing in bonds as well as bond mutual funds, certificates of deposit (CDs) and money market funds. They can do well enough on their own — but it’s when they are part of a diversified portfolio that they really shine as they can be a reliable source of investment income.

In general, this asset class includes the following:

Government Bonds: In other nations, government bonds are a type of debt security whereby you’re “lending” money to help pay for government spending with the promise that it’ll repay your “loan” with periodic interest payments. Singapore Government Securities (SGS) on the other hand are a bit different in that proceeds from SGS issuance are not used to finance government spending, but are instead placed in a Government Securities Fund that’s generally limited to paying the principal and interest on SGS.

Corporate Bonds: Unlike government bonds whereby you’re “lending” money to the government, corporate bonds are “loans” to private corporations that can be issued for 5 to 30 years and typically pay income twice a year. Corporate bonds have the potential to deliver higher returns than government bonds, but also have higher risk of default, depending on the credit rating of the bonds.

Pros: Fixed Income assets in general are a safer investment than equities as they are less susceptible to market volatility and the returns are less volatile. For bonds, there are also ratings that can provide a rough indication of the risk involved in investing (i.e. checking Moody’s or Standard & Poor’s).

Cons: Fixed Income assets such as bonds have relatively stable returns with lesser risk exposure as compared to equities and hence may deliver lower returns making them more vulnerable to inflation.

Asset Class: Equities

In your investment portfolio, equities (also known as stocks) have the potential to provide the greatest returns — but they also have the highest risk as well.

In general, this asset class includes the following:

Common Stock: Common stock usually enables you to receive dividend income based on performance and the company’s discretion, have ownership in the companies you invest in and come with voting rights on some company decisions (e.g. board of directors elections).

Real Estate Investment Trusts (REITS): Similar to mutual funds, REITS allow you to have exposure to investments in properties such as shopping centres, office buildings, hotels and more — enabling you to receive a part of the income these properties generate.

Commodities: These are raw materials and goods such as energy, metals and natural resources. Some commodities, such as gold and other precious metals, can be purchased and held onto while others can be purchased through futures, ETFs or mutual funds that are related to a certain commodity (e.g. oil and gas mutual funds).

Exchange Traded Funds (ETF): While not really defined as equities, ETFs are traded much like stocks. ETFs are a type of mutual fund that’s a collection of stocks, bonds and commodities that’s meant to mirror the performance of a particular index such as the Straits Times Index (STI).

Pros: Equities have the potential to provide the highest returns as compared to cash and fixed income assets. They also have a relatively higher liquidity than fixed income. Some equities are able to pay dividends as well.

Cons: Equities also have the highest risk, which could lead to a loss of investment and dividend income if a company underperforms.

Want to Know Other Ways to Build Your Wealth?

Congratulations — you now have a good overview of the major types of asset classes you can use to build your investment portfolio.

However, if you are still not sure about building a diversified portfolio on your own, you can consider a savings plan or investment-linked plan to help build your wealth. Income has three plans worth exploring — Gro Cash Sure, AstraLink and Invest Flex.

Gro Cash Sure - Insurance Savings Plan*

Capital guaranteed¹ upon the end of premium term
Lifetime cash payouts² starting from the end of the premium term till age 120
Choose your premium term of 5 or 10 years
Get rewarded with our loyalty bonus²
Receive protection as you save
Wealth accumulation continuity with a secondary insured³

AstraLink - Investment-linked Plan*

Regular premium plan that allows you to build your wealth and stay protected from just $100/month
Protection in case of death, Terminal Illness (TI) and Total and Permanent Disability (TPD before age 70). Receive coverage based on the applicable sum assured multiple⁴ of your choice with a Minimum Protection Value (MPV) of 300% of the sum assured (before the anniversary immediately after the insured reaches the age of 70)
Investment Bonus of up to 67.0% of your regular premiums paid in the 1st policy year
Up to 1.0% annual loyalty bonus from the 10th policy anniversary
Flexibility to change, top up or withdraw⁵ your investments based on your needs and stages in life
Experienced fund managers to monitor each fund

Invest Flex - Investment-linked Plan*

Flexibility to take a premium holiday⁶ at no charge for up to 120 months from the 5th policy anniversary
Enjoy an investment bonus of up to 60.0% of your regular premiums paid for the 1st policy year
Provide 0.5% annual loyalty bonus⁷ starting from the 10th policy anniversary or the end of the Minimum Investment Period (MIP), whichever is later
Maximise your investment with up to 105% of your regular premiums paid to purchase units
Have the control of switching⁸your investments between available funds anytime at no charge⁸
Experienced fund managers to monitor each fund

If you're keen on either of these plans, speak to a financial advisor today.

Important Notes:

*Terms and conditions apply.

¹ At the end of the premium term, if the policyholder did not cash in this policy and all premiums for this policy have been paid for, the guaranteed cash value for this policy is equal to total premiums paid, excluding premiums paid on riders. If the policyholder choose to cash in this policy partially, the sum assured after the partial cash payout cannot be less than the minimum sum assured limit or any other amount Income may tell the policyholder about. Income will use the new sum assured and reduced regular premium amount excluding premiums paid on riders to work out the guaranteed cash value (if any) from the policy entry date.

² If the insured survives at the end of the premium term, and if all premiums for this policy have been paid for, Income will start paying the cash benefit at the end of the premium term. Income may pay a cash bonus on top of each cash benefit, by applying a bonus rate to the sum assured, and may include any loyalty bonus payable from the end of 20^th policy year after the end of premium term. Income may or may not pay this cash bonus for each policy year. Each yearly cash benefit is 2% of the sum assured and the non-guaranteed cash bonus without loyalty bonus is 7.3% of your sum assured and with loyalty bonus is 7.9% of your sum assured (based on the assumption that the Life Participating Fund earns a long-term average return of 4.25% per annum). At an illustrated investment rate of return of 3.00% per annum, the non-guaranteed cash bonus without loyalty bonus is 4% of your sum assured and with loyalty bonus is 4.35% of your sum assured.

If the sum assured of the policy is at least $80,000, the yearly cash payouts can be received in monthly payments. Please refer to the policy contract for further details.

³Only you as the policyholder (before the age of 65 years old), your spouse (before the age of 65 years old), or your child/ward (before the age of 18 years old) can be the secondary insured at the time you exercise this option. You can exercise this option to appoint a secondary insured no more than three times. Terms apply for the benefit. Please refer to the policy contract for further details.

⁴Sum assured multiple means the factor we use to work out your sum assured for your basic policy, or for a specific rider that you attach to your basic policy, based on your regular premium when we issue the policy. The sum assured multiple cannot be changed unless the retirement option is exercised.

⁵ Charges may apply, refer to the policy conditions for details.

Investments are subject to investment risks including the possible loss of the principal amount invested. Before committing to the minimum investment period, you may want to consider how long is your investment expectations or needs and whether you are able to keep up with the premium payment should your financial situation changed. Past performance, as well as the prediction, projection or forecast on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of the ILP sub-fund. The performance of the ILP sub-fund is not guaranteed and the value of the units in the ILP sub-fund and the income accruing to the units, if any, may fall or rise. A product summary and product highlights sheet(s) relating to the ILP sub-fund are available and can be obtained from your insurance advisor or online at www.income.com.sg/funds. A potential investor should read the product summary and product highlights sheet(s) before deciding whether to subscribe for units in the ILP sub-fund.

⁶ If the policyholder still has not paid the premium after the grace period, the policy will enter into a premium holiday. During this premium holiday, the policyholder can stop paying the premium provided the policy value is able to cover the fees and charges that continue to be due on the policy. The premium holiday charge may be payable during the premium holiday if it is within the MIP. From the 5th policy anniversary, the policyholder can take a premium holiday without any premium holiday charge up to the specified period according to the MIP selected. Please refer to the policy conditions for further details.

⁷ The loyalty bonus will be provided on the next working day from the 10th policy anniversary. The loyalty bonus is a percentage of the policy value based on the anniversary. It will be used to invest in the funds the policyholder has chosen. The policy must meet all the following conditions to receive the loyalty bonus:
a) The policy must not have ended when the loyalty bonus is provided.
b) The policyholder did not make any withdrawal, except withdrawal under life events withdrawal benefit, for the past 12 months before the date for the loyalty bonus payment.

⁸ The policyholder may switch between funds at any time. If the policyholder is not switching out of a fund completely, Income may tell the policyholder to leave a minimum amount in that fund. Income may charge the policyholder a small amount and set a minimum amount for each switch. Please refer to the policy conditions for further details.

This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income Insurance products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income Insurance advisor. This advertisement has not been reviewed by the Monetary Authority of Singapore.

These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact Income Insurance or visit the GIA/LIA or SDIC websites (www.gia.org.sg or www.lia.org.sg or www.sdic.org. sg).