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What are the Types of Financial Assets?

Financial assets are liquid assets that derive their value from contractual claims. Many different types of financial assets exist, including equity stocks, cash and cash equivalents, mutual funds, etc.

Under financial assets, a contract occurs between two entities where one entity that invests the money is liable for returns as per the contract in the form of dividends, interest, etc., from the other entity where the former has invested money. Financial assets are a form of intangible financial instruments that have a highly liquid nature as compared to other assets.
 

Many different investment plans come under financial assets, including cash and its equivalents, equity shares, fixed deposits, debentures, life insurance policies, etc. Having financial assets is one of the most important parts of your financial planning and thus has to be carefully planned.
 

Read on to find out more information about different types of financial assets.

List of Financial Asset Types

Here are the different types of financial assets:
 

  • Cash and its Equivalents

    Cash and its equivalents include cash, money in the bank account, and cheques. These are short-term financial assets that can be easily converted into cash. Cash equivalents are financial assets that are highly liquid and generate income in the short term. Money market funds2, marketable securities, etc., are highly liquid financial assets.

  • Fixed Deposits

    Fixed deposits are a sum of money maintained by a financial institution. It is a common way of preserving your financial assets safely and earning an interest. The percentage of interest may vary from one financial institution to another. 
     

    For example, if a person deposits ₹1 lakh at an annual simple interest rate of 8% for a year, the person will receive ₹1.08 lakh after one year. It is a less risky investment plan and keeps your corpus safe. 

  • Equity Shares



    When you invest in an equity share, it means that you own a part of the company that you have invested in. Equity shares are financial asset types that give you the right to vote, receive dividends, receive capital appreciation of your stocks, etc. By holding equity shares of a company, you are liable to bear the losses and profits of the company. Thus, these can be risky investments; you must research and then invest in them. 

  • Bonds or Debentures

    Bonds or debentures are financial instruments issued by a company to raise funds as debt for short-term and long-term projects. The holders receive interest on the invested amount, and the principal amount is repaid on maturity. 
     

    Unlike dividends paid on equity shares, the interest payment on debentures is mandatory even if the company suffers losses. In the case of the liquidation of the company, the debenture and bondholders get preference over preference and equity shareholders. 

  • Preference Shares

    Preference shares give the investors the right to get dividends, but they do not get any voting rights. Like bond and debenture holders, they receive a fixed percentage of dividends irrespective of whether the company gains profit or incurs losses. At the time of liquidation, the preference shareholders get preference over equity shareholders. 

  • Mutual Funds

    In the case of mutual funds, money is collected from smaller investors and the collected money is invested in the financial markets, which include debt, equity, and commodity markets. The mutual fund investor receives some units according to the invested amount. 
     

    These units are purchased and sold in the financial market on the basis of the market price. The ROI is the sum of the income generated on the original invested amount and the capital appreciation. A few charges may be deducted here, which differ for various fund houses. 
     

    However, if the value of the units diminishes, the investor will incur losses. Thus, it is an investment plan under which you may earn profits and incur losses. 

  • Life Insurance 

    Life insurance policies are also contracts under which the insurer accepts an insurance risk and agrees to compensate the insured if a specific event covered in the policy occurs. 
     

    The value of an insurance contract is calculated based on the amount of risk it covers. Additionally, some life insurance policies pay the insured a specified amount on the maturity date. In such cases, life insurance policies act like financial assets when they mature. The policyholder received the maturity amount they can utilise for their financial requirements. 

  • Derivatives

    These are a type of contracts that derive their value from the underlying assets that are used for speculation, hedging, etc. However, these are different from debentures in the sense that there is no repayment of the principal amount or accrual of investment income under this investment plan. Some of the common derivatives are futures, options, etc. 

  • Lease Agreements

    Under a lease agreement, one party agrees to let the other party make use of their property in exchange for a specific payment amount made periodically. The amount you receive is a financial asset as it helps one party generate income from the assets leased to the other party.

Conclusion

Having an investment plan is essential so that you can have alternative sources of income. You can invest in a diversified group of financial assets so that you can get reasonable returns on your investments. While you invest, ensure that you read the terms and conditions of the financial instrument carefully. You can also consult an expert to help you make and execute your investment plan.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions (FAQs)

What are current assets?

These are short-term assets that are acquired by a company to meet some short-term obligations. These are liquid assets and can be converted to cash easily. Some of these assets are cash and its equivalents, securities and shares, etc.

What are non-current assets?

These are long-term assets that are acquired by a company to meet some long-term obligations and earn profits. These cannot be converted to cash easily. Some examples include property, land, equipment, etc.

What are the advantages of financial assets?

Some of the advantages of financial assets include flexibility in terms of risk, investment size, time horizon, generation of income, high liquidity, and scope for appreciation of the capital.

What are some of the factors affecting a company’s financial performance?

Some of the factors that affect the financial performance of a company are sales turnover, profit earning, market capitalisation, total capital that has been employed, etc.

Disclaimers

  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not guaranteed issuance plans, and they will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  • 2Market-linked returns are subject to market risks and terms & conditions of the product. The assumed rate of returns or illustrated amount may not be guaranteed and depends on market fluctuations.