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The other savings

The other savings
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First Published: Sun, Sep 27 2009. 09 46 PM IST

Updated: Sun, Sep 27 2009. 09 46 PM IST
For most conventional investors in India, the contours of a perfect portfolio are shaped solely by a healthy mix of stocks and mutual funds. After all, in a bullish market, it is these that promise to rake in the highest returns. But these aren’t the only two asset classes we have access to or can invest in.
Have you considered investing in alternative assets such as gold, art, stamps, coins? Any good financial manager will tell you how these help diversify your portfolio, and most importantly, shield you from turbulence in the market.
The idea is that once your base portfolio is built using traditional assets, you need to diversify it to provide some alternative exposure so that fluctuations in the equity or bond markets are partially offset by their performance.
Alternative options
When we talk of typical investment options, stocks, fixed income instruments, industrial or agri-commodities and currencies are some of the few that immediately come to mind. However, non-traditional assets such as real estate, precious metals and stones, art, antiques and collectibles such as carpets, shawls, coins, stamps and fine wines, among others, are a few investment options you can consider. These have a very low correlation to traditional assets, but promise handsome returns with prudent investment. Let’s look at it this way: Just like a house needs a good foundation, your portfolio, too, must have a healthy mix of large cap stocks, or diversified mutual funds, and a high-quality fixed income exposure.
The cost-benefit factor
Be aware that alternative assets can’t replace traditional investments. Instead, they are suitable only for those who want to diversify the risk in their portfolio once they already have a solid foundation in place. This is so because such vehicles are usually not related to traditional asset classes. For instance, in the event of a market crash, the price of a rare painting you own is unlikely to go down. This is so because it is expected to retain or appreciate in value over time because of its scarcity value.
Also, alternative investments in hard assets protect your portfolio against inflation when the purchasing power of paper money gets reduced. In times of high inflation, investments in gold and real estate can be good options to protect some part of a retail investor’s wealth against inflation.
Unlike pure financial assets such as share certificates or debentures, you can touch and enjoy a work of art or an antique carpet or tapestry. You can derive psychological income apart from just the prospect of capital appreciation.
The disadvantages
First, some alternative assets such as art, jewellery and antiques usually don’t generate any regular income, unlike, say, receiving dividends from stocks or interest from bonds. You can, of course, benefit from the appreciation of the value of your asset, but unless you actually cash out of it, this value exists only on paper.
Second, alternative assets can often be very illiquid, that is, it’s hard to immediately convert a sculpture or painting into cash. However, if you owned a mutual fund, you could sell it and get cash in hand within 24-48 hours.
Third, assets such as jewellery, antiques, art, among others, have handling costs too. You need to store them in a safe and secure place, as well as get them insured to protect theft or damage.
Finally, unlike the capital markets, where there is a regulator, the art market, the real estate sector or the jewellers are not regulated and offer very little investor protection. You could be defrauded or even be sold an impure precious metal.
We list some of the non-traditional assets:
Gold and Jewellery
For many investors, in the Indian context, gold and jewellery are probably more traditional asset classes. Gold is currently trading close to an all-time high (in nominal rupee terms). Today, one can buy gold ornaments from a jeweller or invest in gold exchange traded funds or buy gold bars from a bank. The last two options are probably safer in terms of guaranteeing purity.
Gold is considered one of the best hedges against inflation. Given the sociocultural association of gold and jewellery in India, this is one asset class that families start accumulating early. However, one thing to keep in mind about jewellery is that because of huge variations in design and quality of workmanship, among other things, it is difficult to establish the right price when you want to sell it. You might even end up not getting a fair deal.
Shawls, Carpets and Antiques
These are daily-use items that go through wear and tear, and so one does not usually think of them as assets that can sustain value over time. However, fine pieces of craftsmanship in a shawl handed down to you from elders or a fine rug do have value associated with them, especially if they have aged well. A secondary market for them is probably not that vibrant in India yet, and you will likely have a problem readily converting these assets into cash. It will also be difficult to arrive at an objective valuation for such assets, with lots of differing opinions. But it is worthwhile to identify some of these valuables and treat them as you would any other investment.
Coins and Stamps
Dust off the cobwebs on that box of coins or stamps you so avidly collected while in school. You never knew how much your possession was worth. It’s a popular hobby in the West, and antique dealers trade in coins and stamps based on the collection’s rarity or its intrinsic value.
Old Indian coins, especially those from the pre-independence era made of, for instance, silver, are very popular with dealers. If you have such a collection, be assured your hobby may pay you handsome rewards in the future. Old stamps, too, are very popular with dealers.
Art
The past 15 years have seen a vibrant primary art market develop domestically in India. One might, however, say that it’s still only the preserve of high net worth individuals. The India Art Summit, which concluded in New Delhi in August, was an indication of the new respect with which the world has started looking at Indian artists.
Art is an illiquid asset class, that is, you cannot readily convert it into cash. Also, there will be storage and insurance costs. Additionally, there might be a need for authentication of the work as well (as seen in recent cases of fakes flooding the market), unless you are buying directly from the artist.
However, art is one asset that you can see, feel and touch, and so it’s important that you like what you buy. The Indian art market is not very deep and the secondary market is yet to develop. But in the coming decade, it’s likely that art will become a popular asset class even with main street investors.
Real estate and Land
Many families in India have ancestral properties that range from acres of farmland to family homes. Through the passage of time, these might have been divided among different members of the family. Chances are you could be sitting on a decent amount of value without even knowing it. We are in the midst of a real estate boom in the country and despite its cyclical ups and downs, we are likely to see this boom in real estate continue in the coming decades.
With rising incomes, many families have tapped the loan market to purchase homes. If you are in the market for a primary home, you might want to give that priority over building a stock portfolio. However, if you are punting on the real estate market, you must ensure that your foundation goals and portfolio needs have been met before you take a bet on the direction of the property market. Buying and selling property or land can be a very time-consuming and emotionally draining exercise.
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Postpone your shopping until October to get some great deals
With Diwali and Christmas around the corner, we will soon be in the middle of the peak domestic holiday season. This is also a time when retailers try to woo customers with the best deals. If you are planning to shop for, say, a vehicle, household appliance or electronic items, it would be prudent to postpone your purchase till next month. Once the discount season starts, you may get multiple offers on the same product. It is worth waiting, especially if you are shopping for an expensive item.
Negotiate with your home loan lender
Like many activities, your home loan lender also has monthly sales targets to meet. So if you have a tough case, where you might be under the risk of rejection or tougher terms, time your application around the middle of the month. With their internal sales deadline approaching, the lender might look at your case more favourably. Don’t expect any major changes in their loan underwriting process, but nevertheless, the lender might be less strict about a few items, where they might have some flexibility.
Avoid personal loans for car and education
Personal loans are very expensive, and in the current credit climate, could be as high as 18% per annum because these are unsecured loans, that is, loans where you do not provide any security. Don’t take a personal loan to buy a car or to fund education. You will find specialist auto loans or education loans will be cheaper than a personal loan, and will also likely offer you more overall flexibility.
Avail tax deduction
The new term for colleges has just begun, and you may be one of those who has taken a loan to fund your education or that of one of your family. Under section 80E, you can get a tax deduction of unlimited amount on the interest that you pay on the education loan taken for the higher education of any immediate member of your family (yourself, your spouse or your children). Diligently maintain all documentation so that you can factor this in at the time of thinking about your return later in the financial year.
Dhruv Agarwala and Kartik Varma graduated from Harvard Business School and are co-founders of New Delhi-based iTrust Financial Advisors.
Write to us at businessoflife@livemint.com
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First Published: Sun, Sep 27 2009. 09 46 PM IST
More Topics: Personal finance | Savings | Gold | Jewellery | Coins |