1.13 Financial Assets Vs Real Assets


At this point it is important to note that there are differences between financial assets and real assets. For example, purchase of a real asset such as a residential flat which may cost several lakhs of rupees and an investment in the share of a company (financial asset) is different. However, this comparison gives a measure of return each asset class offers. Sometimes comparison between investment in gold, shares and mutual fund are made to show the risk return profile of each class of investment.

Financial Assets Real Assets
• Available through active markets like stock exchanges • Available in traditional markets
• Offer high liquidity • Offer low to moderate liquidity
• Easy to possess • Difficult process to possess
• Does not require physical holding • Requires physical holding
• Divisible to smallest unit, as for example, one share • Unit of division is large, as for example, one flat or one bungalow

The decision to choose between the procurement of financial or real assets is made based on your need, objectives, time horizon, and risk appetite of an investor. Also sometimes you may have to go for financial assets to acquire a real asset. For example, if you plan to buy a flat after three years you can invest your money in financial assets and later acquire the real asset.

But the choice could be based on:

• Availability of funds.
• Need for liquidity (ability to sell the asset and generate cash).
• Time period of investment.
• Required rate of return
• Tax benefits

Matrix Of Investments And Their Relative Comparison

Features/Investment Return Risk TDS Tax Benefit Market ability Liquidity
Real Estate High Low No No Low Low
Bullion Medium Low No No High High
Antiques Medium Low No No Low Low
Bank Deposits Low Low Yes No* No High
P O Deposits Low No Yes Yes No Medium**
Government Bonds*** Low No Yes Yes Medium Medium
Mutual funds – Debt Low Low No No High High
Mutual funds – Equity High High No Yes High High
Mutual funds Money Market Very Low Low No No High High
Equity Shares High High No No* High High

* Bank deposit with lock-in period of five years and ELSS in mutual fund gives tax benefit

** Some of the post office deposits like NSC have a lock-in period till maturity showing poor liquidity

*** These bonds include bonds issued by the government or the government- sponsored and associated bodies like the RBI.

Following are the descriptions of the attributes in the table above:
Return : Rate of interest / dividend / capital appreciation.
Risk : Volatility or variation in annual or other periodic returns.
TDS : Tax deduction at source
Tax Benefit : Under Sec 80C, 80CCC and 80D.
Marketability : Ability of the investment instrument to find the buyer.
Liquidity : Ability of the investment instrument to convert itself into cash.
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