1.13 Financial Assets Vs Real Assets
WANT TO KNOW THE DIFFRENCE BETWEEN FINANCIAL ASSETS & 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. |