Financial assets are liquid assets that draw their value from contractual rights or ownership claims. These are treated as liquid assets because one can convert economic resources or ownership into cash anytime.
They are also considered financial security or instruments as companies use them widely to finance real estate and own tangible assets. Some examples of financial assets are shares or stocks, bonds, cash, mutual funds and bank deposits.
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What are Financial Assets?
There are mainly three categories of assets including real, intangible, and financial assets. While real assets have a physical form, intangible does not. However, financial assets can have both. In other words, financial assets may or may not have a physical form or existence. The essence of this asset can be determined based on the demand and supply in the marketplace of their trading zone. In addition, most financial assets hold a fair amount of risks.
The significant types of financial assets are retirement investment instruments and demand deposit accounts like savings accounts or fixed deposits. It is quintessential to maintain a balance of financial assets in a company as it determines the smooth money flow in the business.
Understanding Financial Assets
Let’s take an example of a 100 rupee note. It will be constituted as real assets; whereas the total bank balance reflected in the mobile application of the bank will act as intangible assets. On the other hand, the value of this financial asset increases or decreases based on the ownership or claims.
What are the Types of Financial Assets?
- Cash or Cash Equivalents
The cash or cash equivalents present in the balance sheet determine a company’s asset value. These are instruments, present in cash form or are quickly convertible into cash. Some examples are savings accounts, petty cash, money orders, etc.
- Bank Deposits
Bank deposits are savings, fixed or current deposits which are maintained with financial institutions. It serves as the most common way to preserve your financial assets for safety assurance and interest-earning scope after a while. Moreover, the level of interest rate varies across the bank deposits. For instance, an account holder of a money market account enjoys a comparatively higher rate of interest as compared to savings account holders.
Stocks means all shares of a company listed in the stock market for investors to buy. When an individual invests in shares it means he or she owns a part of the company’s ownership. Hence, by actively holding a part of a company’s ownership, shareholders are liable in bearing the profit and loss of that company.
Bonds are popular financial instruments issued by the government or any other firm to raise funds for long-term or short-term projects. This acts as a debt for the lenders as the investment money in the project calls for repayment along with interest. This payment will take place upon the completion of the maturity date of the bonds.
- Loans & Receivables
Banks or other financial institutions offer loans which act as financial assets for these entities. It is because by lending a sum of money to the borrower financial institutions can charge interest during the time of repayment.
- Real Estate Investment Trusts (REITs)
REITs are companies that contain ownership and management of income-generating real estate properties. It includes office buildings, apartments, or shopping malls. Investors can buy shares of REITs and receive dividends from the rental income generated by the properties.
What are the Classifications of Financial Assets?
- Current Assets
One of the prominent classifications of financial assets, these are mostly cash and cash equivalents, share and securities, prepaid liabilities, etc. Every company keeps hold of current assets to meet the short-term obligation of the company.
- Non-Current Assets
Companies mainly acquire non-current assets to achieve future goals and reach profitability. Some examples of non-current assets are long-term investments, land and property, trademarks, plant and equipment, etc.
Advantages of Financial Assets
Financial assets offer flexibility in terms of investment size, time horizon, and risk tolerance. Investors can choose to invest small or large amounts depending on their financial capacity. They can also select short-term or long-term investments based on their investment goals and adapt their strategies according to changing market conditions.
- Income Generation
Financial assets can generate income through dividends, interest payments, or rental income. Dividends are paid by companies to their shareholders, interest payments are received from bonds or fixed-income securities, and rental income can be earned from real estate investments. As a result, investors can maintain a regular cash flow.
Liquid assets are generally more liquid than physical assets. They can be easily bought and sold in the financial markets, allowing investors to convert them into cash quickly if needed.
- Scope for Capital Appreciation
Many financial assets have the potential to generate capital appreciation over time. For example, stocks and equity-based investments can increase in value as the underlying companies grow and become more profitable. Real Estate Investment Trusts (REITs) and properties can also appreciate, providing potential capital gains.
Liquid vs Illiquid Financial Assets
|Basis of Difference
|Liquid Financial Assets
|Illiquid Financial Assets
|Generally, liquid assets are the type of assets which can be easily converted into cash, not depreciating their market value.
|Most illiquid assets cannot be converted to cash easily and are sold only by passing the ownership of the same.
|Some of the common examples of liquid financial assets are cash, bank deposits, mutual funds, money market accounts, shares, etc.
|Some of the common examples of illiquid financial assets are real estate instruments, land, art pieces, jewellery, machinery and equipment, etc.
|Rate of Appreciation
|The appreciation rate of liquid financial assets is lower than illiquid assets. In addition, sometimes, there are losses or risks involved in investing in liquid financial assets.
|Illiquid financial assets have a better rate of appreciation compared to liquid assets. Hence, the holder of illiquid assets can get the benefit of the appreciated value of the assets after a few years.
How does RazorpayX Helps Businesses Manage Financial Operations?
RazorpayX, an impeccable business banking suite is available with easy-to-use facilities for small business owners. The diverse range of banking solutions ensures hassle-free and quick management of finances.
To ensure a business owner operates seamlessly, RazorpayX offers a vendor payment facility to forward all invoices at one go through email. In addition, with the help of this portal, companies can import invoices from any accounting tool. It even allows vendors to attach invoices through vendor portals.
Moreover, budding entrepreneurs can meet their financial goals with the forex funding facility of this business banking suite. This facility is led by an expert team of forex who offers correct information related to forex rates, current RBI guidelines, etc. Hence, with this service businesses can reach their goals and cater to capital requirements for investment.
What are the factors that affect the financial performance of a company?
Factors that affect the financial performance of a company are liquidity, age of the business, profit earning, sales turnover, total capital employed, market capitalisation, etc.
What is the best stage for a business to acquire financial assets?
Businesses face different types of financial obstacles depending on the five stages of business. It involves development, start-up, growth, expansion and maturity. Hence, it is important to get hold of different financial assets at these stages to tackle any monetary shortage and keep enough means for new investment.
How to differentiate between fixed assets and current assets?
Fixed assets are long-term assets that have physical existence like machinery & plant, land & property, tools & equipment. The value of these assets has a timeline of more than a year of useful life. On the other hand, current assets are the short-term assets that businesses deploy to cater to their day-to-day operational needs.
What is the risk involved in acquiring financial assets?
Some of the common financial risks that can lead to different obstacles in the business are foreign investment risk, liquidity and equity risk, credit risk, depreciation of assets risk, etc.