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Which Asset Class Should You Invest In?

Created on 12 Oct 2023

Wraps up in 5 Min

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Updated on 28 Oct 2023

Asset Management

Imagine you're deciding between different dishes at a buffet – there's the trusty biryani, the classic dosa, and the always popular butter chicken. Similarly, when it comes to investing, you might have options like Fixed Deposits (FDs), Gold, and Real Estate. We'll compare the performance of these investment choices, just like figuring out which dish at the buffet might satisfy your hunger the best.

Let's dig into the details to see which one could be the most rewarding choice for your money in the world of investments!

But first, let's discuss the current state of India's economy to assist you in deciding whether investing in India is the right choice or not.

Economy at a glance

Over the years, India has become one of the world's fastest-growing economies, making it a fantastic place for both domestic and global investments. 

A key turning point was between 2014 and 2022 when India made some big changes in how it works and is governed. These changes made the Indian economy more efficient and robust, setting the stage for future growth. Modi Sarkaar effect? 🫢

Recent investments in infrastructure, the expansion of sectors covered by the PLI scheme, and a boost in public investments have triggered a surge in investments in the Indian market.

In the last quarter of 2022-23, the Gross Domestic Product (GDP) is estimated to be around ₹71.82 lakh crore. That's a 10.4% increase from the previous year. This growth has earned India the title of the fastest-growing major economy in the world. 🚀

Let's dive into some interesting findings from the Axis My India Survey, which talked to 5,000 folks of all ages, backgrounds, and jobs in cities of different sizes (Tier-I, II, and III). Guess what? Gold was found to be the most popular investment option in big cities, with 65% of people picking it! Next up were Fixed Deposits (FDs) at 44% and Mutual Funds at 37%, among a few other choices.

Not shockingly, more women (that's 65% of them) preferred investing in gold compared to men (41%). It's like a nod to the timeless appeal of this shiny metal. 

Now that we have this investment scene figured out, let's start by exploring the different types of investments

Understanding Fixed Deposits (FDs)

FDs are like a deal you make with a bank- you give them your money for a set amount of time, and in return, they pay you interest. Sounds cool, right? Well, it was especially attractive when interest rates were through the roof.

More than 95% of households chose to stash their money in fixed deposits. Let's take a little journey back to the year 2000 and see what the financial landscape looked like then. 

Back in 2000, when you looked at the numbers, it was a different story. Inflation was around 4%, and the typical FD rates were a sweet 10 to 10.5%. That's a healthy 6% more than the inflation rate. Not a bad deal, right?

But, as time went on, the gap between inflation and FD rates started to shrink. Fast forward to 2022, and you've got inflation at 6.7%, but FD interest rates only offer 5.05 to 5.35%. Clearly, FDs aren't keeping pace with the rising cost of living. I wonder how they can be a logical investment choice in the present day? 🤔 

Now, let's switch gears and check out another asset class.

The Allure of Gold

Gold has been the star performer, clocking in an average annual return of 9.8% over the past ten years. That's a bit more than the 5.6% annual growth in inflation, which means your gold investment is doing slightly better than keeping pace with rising prices.

Gold has outperformed all other asset classes in just one year. It has brought in impressive returns of 14.2%, surpassing the 12.9% from Indian equities and the 9.5% from US equities.

But here's the catch: gold isn't without its quirks. It's generally more stable and less prone to wild swings compared to stocks, but it truly shines when the financial world gets a little rocky. Take the 2008 financial crisis, the COVID-19 pandemic, and now the Israel-Hamas conflict as examples. In each of these instances, gold prices not only held steady but often saw substantial increases.

The ongoing Israel-Hamas conflict is a significant event that's bound to have far-reaching implications on various aspects of our economy. For a deeper dive into this, you can explore the article titled "Israel-Hamas Conflict and Its Impact on India".

Now, let's steer our discussion towards the next asset class.

Real Estate Investment Insights

Real estate in India is like a slow-moving river; it's not the quickest to convert into cash, but many folks still love investing in land or houses, especially for that rental income. Although it's a popular choice, rental yields here tend to be on the lower side, hovering around 2-3%, unlike the juicier 5-10% you would find in developed countries.

Want to dive deeper into the exciting world of India's real estate industry and its potential for investors? Make sure to check out our article titled "India's Real Estate Industry: A Booming Sector for Investors."

And if purchasing real estate is beyond your budget, there are alternative options available. You can consider investing in a share of a company, a Real Estate Investment Trust (REIT), which specialises in owning or financing income-generating real estate. Interested in learning more? Check: Real Estate Investment Trust: Affordable Real Estate?

Now, let’s…

Turn our attention to the final asset class that's not just about keeping up with inflation but also growing your wealth. 

Exploring Equity Investments

Equity means having a slice of a company through its stock, which can potentially increase in value and provide you with a cut of the company's earnings through dividends. Plus, you can buy and sell it on the stock market. 

Have you ever heard of the Nifty 50? It's a VIP list of India's top 50 big-shot companies. These are the cream of the crop, the high-quality, blue-chip stocks. Over the past 15 years, it has delivered an average annual return of 12%. 

Even when the stock market took a hit, the Nifty 50 kept on delivering returns. So, if you'd chosen to invest in a Nifty 50 index fund back in 2007, you'd be sitting with a solid 12% annual return, leaving inflation and other investments in the dust.

And this asset class is super liquid. You can buy a stock and sell it whenever you want, giving you the freedom and control to manage your investments your way.

You might assume that with such promising returns and good liquidity, a lot of people would be invested, but surprisingly, that's not the case.

Over 50% of adults in the United States are actively investing in the stock market. Surprisingly, in India, it's estimated that only about 3% of households are doing the same. Quite a contrast, isn't it? 

The Bottom Line

Now that you've got a solid understanding of these different ways to invest, you're all set to make a decision that suits you. 

Don't forget each of these asset classes has its own pros and cons, and the best choice really depends on what fits you like a glove. So, be smart with your choices, and make your money work for you. It’s your financial adventure, so make it a great one! 

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Sakshi Dhakre

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Sakshi is an adventurous spirit who enjoys both the intellectual stimulation of Finance and the sensory experiences of good food and nature’s beauty. She has a passion for delving into complex financial topics and distilling them down into easy-to-understand insights. When she's not poring over financial reports, you might find her exploring a new corner of the city, trying out new restaurants and cuisines or admiring the beauty of the night sky.

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