Diwali is a festival which brings light and prosperity and of course, lots of offers. It’s such a time when offers are abundant on various products at each and every corner of the country, from Cookware to Houses and Cars. Why miss out when there is offer on a product, especially, when it’s an asset? One thing to remember while shopping for assets is to know if it’s appreciating or depreciating. In this article, we will try to explore some of the assets to be bought or not to be bought.
As said earlier, assets are of two kinds –
Now that we know that there are appreciating and depreciating assets, let us get into what products come in these two categories. Let us also know the ins and outs of such products so that we could enhance our decision making skills.
Every one of us aspires to have a house of our own, be it to stay or for investment. With the festive season on, there are plenty of offers on card from builders and banks offering discounts on properties and loans respectively. House is definitely an appreciating asset to have in the kitty on account of possibility of good appreciation and also because it is a huge sentiment for we Indians. It is also considered to be a good form of investment yielding high returns in the long term.
People believe that real estate is an excellent form of investment and is a sure hit without negative returns. However, it is only a myth. Real estate is as risky as another equivalent asset class in the long term. There could be a property bubble as there was one before.
There is also a liability attached in this asset for most of us in the form of a home loan. It is quite natural to get tempted towards a home loan with banks having various offers on such loans. Beware of a loan because it can do some damage to your plans of making money via property appreciation. Interest from these loans can be up to 2-3 times your principal amount in a period of 15-20 years. Hence, the appreciation that your property would provide later could be swept off with this interest amount and some capital gains tax.
A simple formula to know whether or not to buy your dream house with a loan is this – Buy only if Investment returns from other products > Interest paid for the loan. If the house is being rented, the rent generated could also be added to the returns side.
Auto sales are always high in a festive season on account of offers from the sellers in the form of accessories, free insurance, etc. However, remember that car is a depreciating asset and cannot be bought as an investment. We can look at purchasing a car only if there is a need for it and not because there are offers on hand. It might also happen that there is a nice exchange offer on hand for the old car and we are looking to upgrade to a higher model car. In spite of getting a good deal, the new car would also be a depreciating asset for you. So, we would still be losing on this investment.
Purchasing a vehicle could be a double hit if we are availing a part loan on it. The interest part of the loan does not even have a tax benefit and the rising fuel expenses would make this investment even more costly.
This is the all time favourite asset for Indians. Gold rules the roost when it comes to investments in India. It is definitely an asset with good potential for appreciation in the long term, however, as they say – ‘too much is too bad’. Moreover, most of the gold bought by an average Indian is in the form of jewellery rather than gold coins or bars, which means there are wastage, making charges and purity issues associated with the purchase. Buying gold in the form of Exchange Traded Funds (ETF) or gold funds (fund of funds).
Even with ETF’s, our investment in gold should not be more than 10 – 15% of the overall investments, as recommended by most experts. If it’s more than this, our portfolio may not shine as well as gold does.
Insurance is meant for protection. A good term insurance policy could in fact be an asset for your family. You can consider purchasing online term insurance policy worth the amount needed to protect your family in your absence. However, beware of other insurance policies which combine insurance and investment. These could do more harm than good in the long term.
Apart from the above mentioned assets, there are financial assets such as stocks, bonds, FMP’s, PPF, equity funds, debt funds, balanced funds, etc. Though there are no offers on such investments, Diwali could be a good time to make a wonderful portfolio with diversified asset classes such as equity, gold, debt, etc or review the existing portfolio (if any) to exit out of any bad investment.
Apart from the above said assets, we could also be lured into offers from FMCG companies offering huge discounts or prizes from various retail outlets. It is better to be careful while opting for those and carefully evaluate the options. We also need to check the surplus cash in hand to be allocated for other goals and then see how much can be spent for the above said assets.
Finally, InvestmentYogi wishes all its readers a very happy and safe Diwali. Control your instincts, invest in a mix of good asset classes and fulfill all your goals.
About the Author:
A.V.Suresh is our in-house Financial Planner and a personal finance enthusiast. He is a Certified Financial Planner(CFP) and also has an MBA in Finance. He can be reached at firstname.lastname@example.org.