Physical Assets Vs Financial Assets: The Debate Post the Budget

23/05/2018

Physical Assets Vs Financial Assets: The Debate Post the Budget

After Budget 2016-17, we gave you Investment Strategies Post 2016. So, what’s changed this year?

The usual investment avenues preferred by an Indian investor are either physical asset like gold and real estate, or financial instruments such as fixed income products and/or equity or equity-linked products.

In the context of Arun Jaitley’s fourth Union Budget, what should be the most preferred investment route? Should one look at mutual funds, bonds and stocks, or should one be considering real estate and gold?

Both sets of investments have their positives and their drawbacks, and in a way, it all depends on the investor: is he or she in it for the long haul, or is it a quick turnaround they’re after? Also their risk appetite?

It would perhaps be prudent to remember that houses and land as investments are difficult to offload quickly, making it tough to raise capital during emergencies.

But first, the basics: Property investment pros and cons

The Plus-Minus Chart

Property: Pros

*Broadly speaking, property as a saleable commodity is less volatile, while steady appreciation of market prices makes it a stable investment;
*The product quality can be improved through renovation, repairs and upgrades;
*It can be rented out, hence is a source of income;
* It is easy to mortgage.

Property:Cons

*Difficult to sell immediately, making it tough to recoup investment during emergencies.

*Stamp duty and registration pushes up transaction costs;

* Initial capital requirement is large;

* Maintenance cost is high.

Pros and cons of investing in gold:

Gold: Pros

*Being smaller in volume and widely available, gold and gold jewellery make for easier investment process (whether Arun Jaitley’s proposal to ban all cash transactions above Rs 3 lakh beginning April 1st will affect demand is yet to be seen). One can also monetise one’s idle gold holdings through the Sovereign Gold Bond Scheme as an alternative to physically owning gold.

*High dividends common over the long-term;
*Can be converted into jewellery for personal use;
*Unlike real estate, easier to mortgage.
*When bought in the form of Sovereign Gold Bonds, they yield an annual interest of 2.75%, paid semi-annually based on the initial value of investments made in cash

Gold: Cons

* Gold prices are interlinked with macroeconomic factors;
* Less transparency in physical buying or selling;
* Safekeeping is expensive in the case of physical gold, and may not be guaranteed;
*Brings no tax advantages (Sovereign Gold Bonds being an exception);
* No regular income in the form of dividends or rent in case of physical gold

Pros and cons of equity

Equity: Pros

*Of the three options, this is the easiest to acquire, and investors can start with amounts as low as Rs 500 (for mutual funds) per month
*Also, risk can be spread out;
*Always profitable in the long-term
*Enjoys high returns and high liquidity;
* Attractive post-tax returns
* Long-term capital gains are tax exempt;
* And what perhaps can be an attractive factor for many investors, professional fund managers (as in mutual funds) can he engaged to handle the money.

Equity: Cons

*Can be highly volatile as well as high risk;
*Often difficult to pick stocks.