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Financial assets are intangible assets that are more liquid than other types of assets. The value of financial assets is derived from the contractual claim of what they actually represent. Some examples include cash and its equivalents, bonds, shares, etc.
Investment plans are essential to ensure that your money appreciates over time. There are many different types of assets that you can invest in. One of the assets that you can invest in is financial assets. Financial assets are the types of assets whose worth is derived from the contractual claim of what they actually represent.
There are many different types of financial assets that you can invest in. Some of these assets include bonds, shares, debentures, fixed deposits, cash and its equivalents, etc. You can choose financial assets as per your investment needs. An investment plan ensures that you invest in the right assets which enable you to fulfil your future financial requirements.
Read on to find more information about the financial asset meaning.
What are Financial Assets?
Let us understand the financial assets definition. Financial assets are a type of financial assets that are intangible in nature. These assets are more liquid than other kinds of assets. The worth of these assets is determined by their contractual claims.
They can be converted to cash quickly. Here, two parties are liable to enter into a contract under some financial assets in which one party (the investor) receives a financial benefit from the amount which they have invested in the second party. Some financial asset types include stocks, debentures, fixed deposits, etc.
Types of Financial Assets
Now that you know the financial asset definition, here is the list of the types of financial assets:
Cash and its Equivalents
This type of financial asset includes cash, money in your bank account, as well as cheques. These are financial assets that are highly liquid in nature and can be easily converted to cash. These can generate income in the short term. Some of the other cash equivalents include marketable securities, money market funds2, etc.
Fixed Deposits
These are a sum of money that has been deposited with a financial institution like a bank, cooperative, or post office. It is one of the top ways for people to keep their money safe while earning an interest on it. The interest percentage might be different according to the institution that you choose.
Equity Shares
When you invest in equity shares of any company, it means that you are the owner of a part of that company. With equity shares, you will get the right to earn dividends, the right to vote, get capital appreciation on the shares that you are holding, etc.
By investing in equity shares, you have to bear the profits as well as losses of the company. These can be risky financial investments, so it is advisable to consult a specialist or have at least some knowledge of the market before investing.
Mutual Funds
In these financial assets, money is collected from a group of investors, and the collected money is then invested in financial markets. These markets include commodity, debt, and equity markets. You are allotted units as per the amount that you have invested.
The allotted units are sold and purchased in the markets as per the market price. The ROI that you get on this investment is the sum of the capital appreciation amount and the income generated on the principal invested amount minus a few charges. However, if the unit value falls, you will have to incur some losses.
Debentures
These are shares that have been issued by a company so that they could raise money as debt for their long-term and short-term obligations. The investors are paid interest on the amount that they have invested, and on maturity, the principal amount is also returned to the investor.
Unlike the payment of dividends in regard to equity shares, the interest on debentures is paid even if the company has incurred any losses. In the case of the liquidation of the company, the preference is given to debenture holders over equity shareholders and preference shareholders.
Classification of Financial Assets
There is no specific classification that can apply to all these assets. But, broadly, these can be categorised into two categories:
Current Assets
These are the types of financial assets that are short-term and are highly liquid in nature, like cash and its equivalents.
Non-Current Assets
These types of financial assets include debentures and equity shares. These financial assets typically are held in the portfolio for a period of more than a year.
What are the Advantages of Financial Assets?
Some advantages of financial assets include:
Some financial assets that have higher liquidity can be used to pay for financial emergencies or bills. These include cash and its equivalents.
Investors feel stress free and financially secure when they have an adequate amount of capital invested in liquid assets.
One of the major functions of financial assets in the economy is to enable the purchase of tangible assets. It becomes possible to transfer funds from people who have surplus funds to where these funds are needed for financing.
Financial assets are diverse and any investor can choose an asset as per their investment goals and risk appetite.
Conclusion
Financial assets are highly liquid assets that are essential to fulfil the cash requirements. These are also an essential part of any investment plan. Financial assets are very important to handle financial emergencies.
Therefore, one should keep a check on their financial assets to ensure they have adequate liquid assets. Each financial asset has a distinct value for the holder, carries different risks and provides different returns. Thus, in an investment plan, having a diverse range of financial assets is always recommended.
