You know that to build wealth, you have to invest your money.
No. Simply saving it will not result in wealth creation! Investing is the key. There is no question about it.
The important thing that you do need to ask yourself, in fact, is this – Where am I going to invest my money?
As a young investor in India, you’re faced with a myriad of investment options, but one fundamental choice you must make is whether to invest in financial assets or physical assets (also known as financial and non-financial assets!). Which is exactly what we want to shed some light on today. Let’s do this one question at a time, and one comparative study at a time! 🤓
What is a financial asset?
A financial asset is described as an intangible asset. It can refer to stocks, shares, funds, bonds, bills, or any other form of a commodity that holds a monetary value.
As a young investor in India today, you will find yourself spoilt for choice when it comes to the world of investing! However, there are two financial assets that will keep cropping up as investment instruments that are important for making your money grow – stocks and mutual funds. Let’s look at the pros and cons of each of these options!
Potential for High Returns: Historically, stocks have provided some of the highest returns among all asset classes over the long term. With the Indian economy growing steadily, there is potential for further growth in stock prices.
Diversification: Mutual funds provide instant diversification by investing in a range of assets, reducing risk compared to individual stock investments. This has been made even easier with micro-investing apps like Deciml, where you can invest as little as ₹1!
Liquidity: Stocks are highly liquid, meaning you can buy and sell them easily. This flexibility allows you to capitalize on opportunities or exit positions when needed (but always practice caution when making such decisions!)
Professional Management: Fund managers are like investment angels! They make investment decisions on your behalf, which can be a relief for those who lack the time or expertise to manage their investments actively. Their knowledge can be a god-sent!
Diversification: You can invest in a variety of sectors and industries, which provides a degree of diversification to mitigate risk. The stock market can be an exciting place if you are a careful investor!
Liquidity: Mutual fund units are tradable, making it easy to enter or exit the market. Though these investments are considered relatively liquid, you have to be sure to check about any exit loads associated with them!
Risk & Volatility: Stock prices can be highly volatile and can be risky, leading to potential short-term losses and emotional stress. It’s important to have a long-term perspective when investing in equities.
Fees: Mutual funds charge management fees, which can eat into your returns over time. It’s essential that you understand the fee structure and choose funds that offer a manageable expense ratio.
Market Knowledge: Investing in stocks requires research and market knowledge. You need to understand the companies you’re investing in and stay updated on market trends. This is only a con in the sense that it might take some years of practice!
Returns May Vary: Mutual fund performance depends on the skill of the fund manager and the asset allocation. Not all funds perform equally well. You can overcome this hurdle by focusing on key parameters that analyze a fund’s performance.
Mutual funds are a good starting point if you’re a first-time investor, but it can be exciting to explore the stock market as a valuable financial asset as well. Whatever you choose, be sure it aligns with your risk capacity, investment horizon, and financial goals.
What is a physical asset?
A physical asset is described as a tangible asset. It refers to investments that you can touch, feel, and see. Property, equipment, vehicles, gold, and silver are good examples of the physical assets that we are talking about.
We want to focus on the case of two physical assets that have stood the test of time and continue to be promising investment avenues. Let’s take a look at the pros and cons of real estate investments and gold.
Tangible Asset: Being a physical asset, real estate can provide a sense of security and ownership to the investor.
Safe Haven Asset: Gold is often viewed as a safe investment during times of economic turmoil.
Rental Income: If you invest in rental properties, you can generate regular income from tenants.
Liquidity: Gold is highly liquid and can be converted into cash relatively easily.
Potential for Appreciation: Property values can increase significantly over time, providing a robust capital appreciation.
Portfolio Diversification: Adding gold to your investment portfolio can provide diversification and reduce overall risk. You can now invest in digital gold as well!
Illiquid: Real estate is relatively illiquid, meaning it’s not easy to sell property quickly when you need cash. In fact, the process of liquidity can be quite tedious!
No Income Generation: Gold does not generate income like dividends from stocks or rental income from real estate. It is a static investment, the value of which is changing over time.
High Initial Investment: Buying property typically requires a significant upfront investment, which may not be feasible for young investors.
Price Volatility: Gold prices can be highly volatile, and they are subject to market forces and geopolitical events. It can be hard to sell gold if the need for money arises when the price is low!
Maintenance Costs: Property ownership comes with maintenance and upkeep costs that can eat into your rental income.
Storage Costs: Storing physical gold safely can incur additional expenses, for instance, you might have to loan a locker from a bank at a fixed fee.
While investing in gold might be easier to start, investing in real estate is only really possible if you set a target to do so, and then invest to create the funds that will ultimately enable your real estate investment.
This might seem like a lot of information, but believe us when we say that it is good to have options when it comes to investing your money. It’s not wise to put all your eggs in one basket, and these options make sure you are getting the right value for your money while also minimizing your risk profile. The important thing to remember is that investing itself is the key to making big gains – you can explore your options on the way to financial freedom!
A financial asset is described as an intangible asset that holds a monetary value.
Stocks, securities, insurance, shares, funds, bonds, bills, etc. are some examples of financial assets.
A physical asset is described as a tangible asset that you can touch, feel, and see.
Property, equipment, vehicles, gold, and silver are good examples of the physical assets that we are talking about.
There is no single physical asset that can be classified as the best one to invest in. However, gold is considered one of the most popular physical assets that people generally choose to invest in.