Fact of the matter is, for a number of historic reason, we love to hoard. We hoard less than we used to, but there’s no denying the fact that we still do. But is hoarding a smart and safe way to plan your finances and future? We think not.
Don’t hoard. That should be the bottom line as far as prudent financial planning goes. And when we say don’t hoard, we mean Real Assets, in particular. For Real Assets are far from the smartest thing in the world to sit on. So here’s is how you can go about saving and accumulating wealth without feeling the need to hoard Real Assets.
Our job is to meet families, understand the need and finances and suggest prudent options. Every day we come across families with an excessive passion to own two, three or more real assets. Most of the time they don’t know the reason behind why they want to hoard properties. This fascination of Real Asset accumulation is quite incredible, considering the so-called gains.
Once you see the real price of making large investments in land and other Real Estate, you’ll start seeing much smarter places than land and Real Estate to invest your hard-earned money in to finance future plans like Education and retirement.
For instance, let’s look at the case of Mr. Ram who chose to invest in a flat to finance other future plans. We analyzed the case in point. And discovered his money could have been put to much better use elsewhere. Let’s see how.
Case study – Real gains or Real loses
The decision that had to be made was whether to hold on to the Real Estate asset or sell and invest elsewhere. The apartment in this case was booked in 2008 for Rs. 6000/- per Sft. The Rs. 31 lac as down payment and the rest of the amount as Rs.1.4 crore as a loan. How has that investment performed?
Expected price rise is Rs. 12000/- per sft in 2015, which is when apartment is ready.
To compare the same investment in another financial asset, we assumed that monthly EMI of Rs. 1.4 lac is invested in good large cap and midcap fund combinations that will earn 12% cumulative over the 8 years in question (2008 – 2015). We also added the gains that will accrue if the down payment was invested at the same rate. The table below reveals in black and white what it all adds up to. Enough said.
Conclusion is Investment in only one particular asset class may deliver returns with safety assumption but opportunity cost is very high. One has to keep eyes and ears open to invest in much simpler asset classes like Financial Asset.