There is a festive atmosphere to celebrate faith. As you get together with your friends and family and rejoice, you may also want to think about your faith in personal finances. Most Indian households have unequivocal faith in property and gold as asset classes for investments.
There is a euphoria in the real estate sector. The NSE Nifty Realty index has doubled over the past year when the benchmark index like the Nifty gained merely 19-20%. Investors see robust growth in companies’ profits in the real estate sector.
A surge in the property sector primarily drives that. You are buying more real estate than before. A traditional middle-class home in India owns a home and buys another to let. The idea is to generate a second source of income. It is prevalent across the country.
However, investing in property is just one of many things you can do as an investor. It is not necessarily a rewarding idea. Average rental yields in India are not more than 1% of the property investment in major cities. Rental yields in major financial centres like London are 7-8%. You are investing far too much money for absolute cashflows that you get as rent. It is locked up in a house that barely generates a return to justify that effort.
If you have a home loan, it gets even more difficult. This column has discussed the option of real estate investment trusts or REITs. If you are bullish about the rental income sector, you can own a commercial complex in fragments and generate a steady return in the long term. These companies know the right places to own commercial premises and generate a rental income. Such an income is distributed among shareholders regularly. While there is little capital appreciation, you can generate a dividend income from REITs.
The other physical asset is gold. It is witnessing a significant interest from large institutions like central banks. The interest from Indian households remains as strong as ever, too. If you want to invest in gold, you may want to look at gold exchange-traded funds. While gold has had a good track record regarding the price movement, it is a hedge against extreme events. Most experts recommend a 10-15% allocation to gold as an investment in your long-term portfolio.
The matter of faith
Financial assets need some bit of faith when it comes to financial planning. You are more likely to meet your long-term financial goals with adequate investment in financial assets. If you go back to data on the Nifty Realty index since it started in 2010, it has barely doubled in value. The NSE Nifty has jumped three and a half times over the same 14 years.
That means if you invested in shares of companies that sell property, you just doubled your money. However, the money invested over 14 years in 50 Nifty stocks grew multiple times.
When it comes to the long-term, you need to make it an issue of faith. Stock markets have a proven track record to generate a reasonably higher return than any other asset classes over the long term.
We are talking about 15 years. That is the time frame you consider while putting aside money for retirement or your young child’s education. When you invest your money in equity assets and stay invested, you give it a chance to grow. You should invest the money you do not need now in equity assets. The key is to stay invested and give it a chance to grow.
While over 15 years of equity investing could be rewarding, you must also appreciate the trajectory equity prices take while generating that superior return. The overall return could be higher, but it could vary up or down based on prospects for future profits. You must educate yourself about that and ensure you have enough money to meet your emergency needs before you begin to invest in equity assets. According to the industry association data, mutual funds are struggling to keep investors beyond five years. Equity assets need more faith than that.