Although real returns from both asset classes are similar, real estate comes with the added advantage of security and long-term wealth creation.
Buying something of value on a festive occasion comes naturally to Indians, and gold has long been the first choice for festive shoppers. However, many investment-savvy Indians today are questioning traditional practices and opting for assets that are better aligned with their current budget and long-term wealth creation goals.
“Since gold is such an integral part of our culture, thus people would invest in gold jewellery whenever possible. Over the years, one has 15 lakh worth of gold assets in the form of jewellery. However, when someone falling short of money to make the down payment for my dream home, it is advisable to sell a part of this asset to raise the capital. Since liquidating to invest in a long-term asset, is right. Thus, from experience I can state that gold came to the rescue when I needed it, making both, real estate and gold an important part.
Inflation-adjusted returns
While real returns on both gold and property have lagged behind the current inflation rate of six per cent, asset management experts are of the opinion that property offers more liquidity in terms of rental returns in addition to capital value appreciation, whereas gold only offers the latter. Hence, for thousands of home-owners, especially first-time investors, liquidating their gold investments is a stepping stone towards down payment of their dream home.
“This has been the conventional practice among Indian families for years. However, at current growth rate of about 5.7 per cent, investors are unable to yield inflation compatible rates from gold ornaments due to smelting loss. It is more advisable to secure your investments in a well-performing mutual fund if home-ownership is your ultimate goal. Additionally, gold-secured loans are also preferable over high-interest personal loans if you are trying to meet a last-minute financial crunch when buying property.”
For those who want to take the equity route, “While they don’t score high on the auspiciousness quotient, gold Exchange Traded Funds (ETFs) are also advisable for those who wish to benefit from real returns on gold as a commodity. Unlike physical gold like ornaments and coins, ETFs don’t need to be stored in bank lockers because of the threat of theft. However, unlike property investments through a home loan, there are no tax benefits to gold purchase. In fact, ornaments attract GST in addition to making charges.”
Returns over sentiments
With home loan interest rates at an all-time low and many benefits for first-time homebuyers such as preferential stamp duty and PMAY, the total cost of home acquisition has reduced dramatically over the last few years.
“Today, gold purchase during festivals is more for symbolic value rather than real returns. Considering lowest-best home loan interest rates, pandemic-driven price corrections in the property market and many other government sops for homebuyers, real estate has the potential to outperform gold and deliver inflation-corrected returns over the next few years. Many argue that the cost of property maintenance and taxes diminish the wealth gains over the long-term. But such costs must be viewed as investments that only aid in further appreciating the asset. Plus, real estate investments can be leveraged with affordable bank loans. Hence, one can buy assets worth three times the equity available for such case. No such leverage is available in case of gold. Further, aspiring homeowners with waiting power can leverage a range of developer offers and discounts to gain additional capital value appreciation from under-construction properties.”
“A healthy investment portfolio must contain a mix of debt assets like bank fixed deposits, gold, equity, and real estate. The percentage allocation and further diversification within each asset class depends on each investor’s individual risk appetite and financial goals. Hence, one can take baby steps towards their big-ticket property investment through disciplined investing in growth-oriented mutual funds over a 5–7-year period. Don’t forget to hedge your risks with a full-coverage term life insurance and health insurance plan.”
