What is a safe asset?

Safe assets refer to low-risk assets that can weather market volatility. The word itself justifies what safe asset means.

Safe assets have stable nominal payoffs, high liquidity and carry minimal credit risk. So, safe assets are valuable during turbulent periods in financial markets, as they hold on to their nominal value while other assets decline.

Some of the most commonly held safe assets are Treasury bills, real estate property, cash, money market funds  and mutual funds. Additionally, sovereign debt instruments, which are issued by governments of developed countries, are known as the safest or low-risk assets.

Safe assets examples

Often referred to as safe havens by investors, safe assets allow investors to preserve capital and resist high market volatility. While most investors tend to diversify their portfolio with a portion of safe assets, conservative investors often consider safe assets as their majority investment to preserve capital.

For a better understanding of what a safe asset means, let’s look at some examples.

• Real estate property

Real estate is considered a safe asset and can provide protection amid market turbulence. While assets such as stocks tend to rise or fall in a short period of time, house prices tend to be much less volatile. However, real estate value can also fall in the time of economic recession, such as the 2008 financial crisis. 

• Treasury bills

Backed and issued by governments of developed countries, these financial instruments are considered low risk. US investors often opt for them as a safe asset since the default rate is nearly zero. These bills have different times of maturity and yields can vary with market cycles.

• US Treasuries Mutual Funds

To avoid cash in their portfolios many investors use safe mutual fund assets. The US government mutual fund, for example, consists of a well-diversified portfolio of US government securities.

• Money market mutual funds

These funds can offer investors slightly higher returns compared to standard savings or checking bank accounts. Although this vehicle has a mandated net asset value of $1, they are low risk and will hold short-term US government securities.