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Investment options – Gold or Real estate

Investment options – Gold or Real estate


Indians have been traditionally focused on gold for asset acquisition and consequently the security it confers.  Even though this trend continues, the past decade is witnessing real estate rise as the supreme go-to option in the financial portfolio for many of us.  The proof of the same is the latest RBI report on housing finance and has put this philosophy into a frame of reference.

The report disclosed that 76% of household wealth in India is in real estate and that 60% of the poorest 20% in the country own land or a dwelling unit.  Also, the largest expected growth (in absolute terms) is in real estate.  Durability and rarity are the two commonalities between these entities.

Real estate comes with structured tax benefits together with the prospect of gradual yet certain capital appreciation.  Ample financing options increase the allure.  Even though ownership is tangible in both cases (house and gold), homes have the distinct advantage of catering to one of the basic needs of a human being; shelter.

Turning our attention to gold, how really profitable an investment is it?

Gold’s pecuniary benefits diminishes due to some setbacks.  To begin with, gold does not generate cash flow whereas real estate does.  Additionally, gold prices vary since it is tied to international rates.  Investing in gold is a favorable short-term option (three to four years) but probably maxes out in seven years.

The most secure way to invest in gold for the short term is physical possession of gold bullion (coins/bars.)  This flies in the face of our logic.  Historically, we Indians have bought gold as jewelry.

How exactly is gold jewelry a bad investment?  First and foremost when you buy jewelry, you will be charged 15% above the value of the gold.  This is the ‘making charge’ –the money paid to turn a gold bar into jewelry.  Next when selling jewelry, you receive around 15% below the value of gold.  This represents the cost of melting the old jewels to recover gold.  Consequently, the overall cost of investing in gold is around 30%.  This is significantly high.  Is an investment with such high transaction costs worth it?  Transaction in real estate is definitely economical than this.

On the other hand if an investor is looking for longer-term investment (say more than a decade), property is a more secure option.  Furthermore, the real estate market is less volatile and market prices are bound to increase whereas future gold prices largely depend on multiple macroeconomic factors.

All said and done, the fact of the matter is return on investment.  Developing areas provide a higher return on investment than their developed counterparts.  Thus, a viable idea for investors is buying property in satellite cities/townships in order to maximize ROI.  If they opt for a comfortable plan by making deferred payments, the net ROI will be higher vis-à- vis the sum invested.

In summary, realty is one of the best assets in times of uncertainty and a safety net.


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