All these four asset classes have their own combination of growth and risk associated with it. The asset allocation strategy of an investor among the various asset classes is influenced by a multitude of factors and is as much art as it is science. While investors with more risk appetite will opt for equity-based investment products, an investor who prefers stability or in other words is a risk-averse will prefer Debt/Fixed income investment tools more.
However, financial companies have designed investment products that are not pure-play Equity/Fixed income/Cash instruments but are hybrid in nature and have varied components of equity, debt and cash instruments.
Pooled investments are managed by professional fund managers and are considered to be safer for individual investors. These pooled investments have exposure to almost all asset classes to spread risk, maintain growth rate and liquidity.
Stock represents a part of ownership in a firm. Buying stock of a given company is equivalent to being a part owner of the company, and the investor, in essence, becomes part owner of all future earning of the company. The value of an investment in stock is dependent on the performance of the company. If the company performs well, the value of the investment goes, and vice versa. Investment in stock entails higher risk as compared to other investment products like fixed income/debt/bonds and cash instruments. Additionally, money invested in stock has lower liquidity as compared to other products. However, the possible upside of investment in stock is much higher as compared to other investment products. Investment in stock should be done only after proper research on the company, its future prospects, the market it is operating in and other factors influencing the company.
It is very strongly recommended to invest in a group of companies (portfolio) rather than investing in a single company. By investing in companies from different domains and with varied market capitalization, the inherent risk can be substantially managed. However, developing and managing a well spread out portfolio requires a good amount of research, insight and constant tracking that may be difficult for an individual investor.
One of the best ways of avoiding this effort is by investing in Mutual Funds. A Mutual fund is an investment company or a trust in which investors pool their funds and invest them in a wide variety of securities. (District Human Resources, n.d.)