July 23 2019
One of our investors has recently redeemed portion of his equity investments to fund his daughter’s higher education. He was initially planning to fund his daughter’s higher education by selling a piece of land that he had bought at his native place. This equity investment was originally meant for his retirement. But when the time came to realize his investment in physical asset like land, he could not find a suitable buyer. Instead, his 5 year savings invested in a financial asset like mutual fund became the savior for the dream education of his daughter.
What are physical assets
Physical assets are those which we can touch, feel and see. Real estate, commodities and gold are examples of physical assets.
What are financial assets
Financial assets are intangible assets such as bank deposits, bonds, stocks, mutual funds etc. They have no physical presence except for the existence of a document that represents the ownership interest held in these assets.
Advantages of financial assets over physical assets
1) Liquidity-When it comes to withdrawing money from the investment, financial assets score over physical assets. Financial assets can be easily converted into cash in a short span of time. Fixed deposits can be liquidated, mutual funds can be redeemed easily and money gets credited into bank account in 1-3 working days.
On the other hand, selling real estate is not easy as it may take months and years to find the right buyer. Gold can be easily liquidated but it is ingrained in human behaviour that selling gold is a sign of financial distress. It is generally observed that people tend to cling to gold and do not sell it until it is the last resort.
2) Transparency-Financial assets are more transparent in terms of their valuation and charges involved. Their current value can be checked and tracked on the daily basis.
In the case of real estate, it is difficult to know the correct value of the property. Similar houses in the same area fetch different prices. Also, only after the deal has finally happened between the buyer and the seller, one can know the actual value of an asset.
Even in case of gold, whether it is in form of jewellery or coins and bars, the actual value is known only once it is sold. Specially in case of jewellery, the purchase price and the selling price can be significantly different due to deduction of making charges and materials used other than pure gold.
3)Divisibility -One of the many advantages of financial assets is their flexibility to be liquidated fully or partially, as per the requirement of an investor.
Physical asset like real estate cannot be sold in parts. Also, real estate usually involve large amount and has to be sold in whole, no matter how small the requirement of an investor is.
4) Taxation – Prior knowledge of the exact value of a financial asset makes it is easy to evaluate the taxation involved in the transaction, before actually completing the transaction.
Checklist : Financial Assets vs Physical Assets
| Features | Financial Assets | Real Estate | Gold |
|---|---|---|---|
| Liquidity | Yes | No | Yes |
| Transparency | Yes | No | Limited |
| Divisibility | Yes | No | Limited |
| Partial withdrawal | Yes | No | No |
| Prior Tax Calculation | Yes | No | No |
Conclusion
Physical assets like gold and real estate give us a sense of ownership but at the time of requirement, it is the bank FD or a mutual fund that first come to our mind due to their easy liquidity and transparency. Investment in physical assets may be considered for asset allocation and personal satisfaction, but to complete financial goals, it is advised that investment should be done in financial assets only.
Discuss your asset allocation and financial goals with your financial advisor or consult your Personal Investguru Advisor@9910423232 before making an investment decision.
Happy Investing!
Tulika Agarwal
Co-Founder, Investguru