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Financial Planning

Physical Assets Vs Financial Assets: The Debate Post the Budget

08 February 2017
Which of these financial instruments are a safe bet post #Budget2017?
 

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?

Related: Why long term investments are better

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: what are the plusses and minuses of each?

The Plus-Minus Chart

Property: Positives

*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: Negatives

*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.

Related: On the fence about Real Estate Investment ? Here are 6 myths you can stop worrying about

Gold: Positives

*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 alternate 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: Negatives

* Gold prices are interlinked with macro-economic 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 

Related: Will India lose interest in Gold?

Equity: Positives

*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: Negatives

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

Related: Fact: equity investments are always more profitable in the long term [infographic]

Infrastructure funds

In his budget, Finance Minister Arun Jaitley has tried to prop up the infrastructure sector, where companies engaged in construction work of roads and bridges win contracts; these are prime picks for infrastructure mutual fund schemes.

Thus, even before a real estate investment opens up around a new infrastructure project that is being developed, the opportunity to invest in a mutual fund related to it opens up.

Going by the allocations, a lot of such mutual fund avenues are likely to be opened up. The budget has allocated over Rs 240,000 crore for the year of 2017-18 for the transportation sector as a whole, including rail, roads, shipping. Of this, the Railways get Rs 131,000 crore, including state funding of Rs 55,000 crore.

The problem, however- as has been pointed out in some quarters- is not the intention or the supply of funds, but the commitment and implementation of the same.

A case in point is the delay in setting up the $75-billion UAE-India Infrastructure Development Fund; UAE says the delay is on account of India dragging its feet on creating the requisite governance structure.

Under the plan, which was agreed upon by the two sides during Prime Minister Narendra Modi’s visit to the UAE in August 2015, the Emirates government is committed to supporting investments of $75 billion over a 10-year period in India’s infrastructure sector such as roads, railways, ports, airports and industrial corridors.  Nothing has moved since then.

It is precisely for reasons such as India’s procedural red-tapism that existing investors in infra funds are being advised to move to diversified funds.

Related: How debt and equity based mutual funds differ in risk

The government is also committed to promoting affordable housing; stocks of real estate developers engaged in such projects are bound to perk up.

The problem is, much of this is the “Housing for All by 2022” initiative for providing affordable housing to the urban poor, which is part of the Smart City plan, where the various state governments are stakeholders. Once again, the element of uncertainty creeps in.

But while investors in the real estate projects will find it difficult to pull out, those investing in the stocks of developer companies can pull out.    

Related: Are You One Of The 8 Types Of People That Will Benefit From #Budget2017?

?This advice is generic in nature. For specific investment guidance, please contact a financial expert/advisor.

 
 
 
 

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