What’s real and what’s not…..

Many of us find it comforting to buy and hold assets that are tangible, like house, land, gold etc. These are called “real assets”. The other type of assets are stock certificates, bonds, money in a deposit product, Gold ETF’s, etc. These are called “financial assets”.

Real assets Financial assets
Tangible Not tangible
Available only in traditional markets Available in active electronic market places
Difficult to transact (buy and sell) Easy to transact (buy and sell)
Needs physical holding (relatively more expensive) Does not need physical holding (relatively less expensive)
Limited liquidity High liquidity
Unit of transaction is large (Entire house/property) Unit of transaction is small
Limited opportunities to diversify Significant diversification is possible

 

The decision to choose between a financial or real assets is made based on the needs, objectives, time horizon, and risk appetite of an investor. Having said that, in India the percentage of wealth invested in real assets is very high. This is a fairly risky strategy especially from a liquidity perspective, i.e, when one needs significant amount of funds it is very difficult to liquidate real assets at reasonable prices. Also income  yield from real assets is very low, for instance gold does not yield any income, and yield from a real estate (especially residential) is about 3 to 4% ( yield = yearly rent/ price ).

We suggest that

  1. You should look to own a mix of real and financial assets, as both of them have strengths that are complimentary and will help build a very robust portfolio. Your should look at having atleast 20% of your wealth in Financial assets.
  2. As your wealth increases you should look at having greater percentage of your wealth in Financial assets as they have greater potential of return. You can read about investment patterns for HNI’s in this article
  3. Also if you are planning for retirement you should have a good percentage of your assets in appropriate Financial products to improve the liquidity and yield of your assets.

 

Happy investing.

 


 IndusWealth:Making your money work for you

 

About Praveen Reddy

http://in.linkedin.com/in/praveenreddyinduswealth

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