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T.M. PREMNATH ASSISTANT PROFESSOR DEPARTMENT OF MANAGEMENT STUDIES J.J.

COLLEGE OF ARTS AND SCIENCE PUDUKKOTTAI-622003 Cell : 98941 86791 Email :prosem79@gmail.com

S.PALANIAPPAN M.Phil SCHOLAR DEPARTMENT OF MANAGEMENT STUDIES J.J.COLLEGE OF ARTS AND SCIENCE PUDUKKOTTAI-622003 Cell : 98949 61719 Email: splvlcc@yahoo.co.in

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Investment in Real Assets and its Challenges


Introduction: In todays volatile market situation an investor has to be very much choosy in selecting his investment alternatives. Securities market offer lot of potential to generate profits as well as losses. Trading on market indices has become mere speculation. Options and futures are another area where investor can mint money. But it is also not free from market pitfalls. Fixed income securities provide safety to the investor. But income from those assets will not protect the investor from todays skyrocketing inflation rate. In this scenario Real assets provide a solid alternative in making the right trade-off between safety and return. Real assets: Physical or identifiable assets such as gold, land, arts, equipment, etc. are called as real assets. It includes Land and buildings including residential property and commercial property, gold, silver and diamond jewelry, investments in precious metals such as gold and silver bullion, currency, art and crafts, Consumer durables, furniture, electronic goods, vehicles etc. Investment in real assets is made when the expected returns are very attractive. Bullion Investment: The bullion market offers investment opportunity in the form of gold, silver, and other metals. Specific categories of metals are traded in the metals exchange. The bullion market presents an opportunity for an investor by offering returns and end value in future. It has been observed that on several occasions, when the stock market failed, the gold market provided a return on investments.

Precious metals: The term precious metal is traditionally used when referring to gold, silver and platinum. They are named precious metals due to their particular chemical composition. They are the least reactive of all

metals, having higher melting points than other metals and are on the whole rarer than many other metals. They are therefore desirable and valuable and often retain their value during economic difficulties and therefore make a solid and invariant investment.

Real Estate: Real estate investing involves the purchase, ownership, management, rental and sale of real estate for profit. Buying property is an equally strenuous investment decision. Real estate investment is often linked with the future development plans of the location. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive and is highly cash flow dependent. It is risky investment. The primary cause of investment failure for real estate is that the investor goes into negative cash flow for a period of time that is not sustainable, often forcing them to resell the property at a loss. Real estate markets in most countries are not organized or efficient Individual properties are unique to themselves and not directly interchangeable, which presents a major challenge to an investor seeking to evaluate prices and investment opportunities. Information asymmetries are commonplace in real estate markets. This increases transactional risk, but also provides many opportunities for investors to obtain properties at bargain prices Investing in Coins: Coin collecting was originally a pursuit of the aristocracy. Coin collecting is basically the hobby of acquiring coins, learning about them and storing them. Coins vary in price and many factors can affect their value, the precious metal market, the coins popularity, its age and rarity. Most collectors will specialize in one field. They may prefer coins from a particular country, time period or even from a specific mint. Coins are graded, which means that such things as stains, scratches, dents and general condition all have a bearing on the value of the coin. To keep coins in good condition they should be preserved from chemicals and humidity. If a collection is valuable it should be stored in a safe or safety deposit box. There are no guarantees for the return on investment but building up coin collection could be an enjoyable and interesting hobby.

Investing in Fine Art: Unlike other real assets while investing in fine art the price of paintings can go down as well

as up. However with fine art what ever happens to the market, investor will still possess a painting or object to enjoy. In fine arts quality items will always stand the test of time. Art should not be considered a shortterm investment, but painting or artwork should be hold by the investor for a minimum of ten years.

Investing in Antiques: An antique investor should specialize in some areas. Investors should not buy a range of antiques, as "collections" will give less appreciate in value when compared to mix of items. Another benefit of specializing is that investor will soon become skillful at spotting growing trends. Only those antiques which are perfect and free from cracks should be bought. Investor should get the knowledge of segregating real ones from fakes and duplicates. Antiques should not be bought at the heights of fashion. Also Antiques has to be looked after properly. Investing in antiques is a medium to long-term venture. However, unlike with stocks and shares, antique investor can enjoy his investment while it appreciates in value.

Investing in stamps: Stamp collection includes collection of postage stamps, watermarks, papers and method of printing, type of ink, gum and perforation. Stamp collectors will also show interested in any post marks as well as postal history and political or geographical changes that affect the areas where different stamps originate. Stamp collectors should specialize in particular types of stamps such as commemoratives, first day covers, stamped envelopes etc. New issues from the post office may take as much as 30 years to appreciate beyond face value. There are no guarantees that investing in stamps will make a fortune in a short space of time. It will give return over the years. With advancement in communication technology, stamps used in the past are becoming rare possessions. It is an enjoyable and interesting alternative to traditional stock market investments.

Investing in Classic Cars: Cars manufactured before 1903 are called veteran cars, cars between 1903 and 1933 are known as vintage cars and those that are at least 15 years old are grouped under classic cars. Not all cars demand huge respect. Price will come in the form of substantial research, professional appraisal and cost of maintenance. Market watch could also include the activities of Hollywood or the name tag of the previous owner. The car market can be unpredictable but for great wheels, the pick up is still good. Some low budget, low maintenance cars with good potential include the BMW 2002 series and the Alpha Romeo Giulia coupe. As a simple rule, if the investor does not have love cars, he should not look upon them as an alternative to bonds and equities. Investment in cars will require more maintenance and it will deliver fewer profits than expected.

Memorabilia, Antique Furnitures and old toys as Investments: Memorabilia includes any item associated with film or music or sport. Memorabilia appreciate massively in value. Film memorabilia include costumes, photographs, posters, clapperboards and film

cells. Posters representing classic films of the 1950s and 60s are worthy collections. Sports memorabilia include bats, balls, caps, autographs etc. Antique furnitures, toys, comic books, typewriters, gramophone players telephones etc are also appreciating in values.

Advantages in Real asset investments: Portfolio diversification:

Most investment portfolios primarily hold traditional financial assets such as stocks and bonds. Diversifying portfolio will offer added protection against fluctuations in the value of any single asset or group of assets. Risk factors that may affect the gold price and antique furnitures are quite different in nature from those that affect shares and debentures. Statistically, portfolios containing gold are generally more robust and less volatile than those that do not.
Inflation hedge: Market cycles come and go, but over the long term, precious metals retain its purchasing power. The value of real assets in terms of the real goods and services that it can buy has remained remarkably stable for centuries. In contrast, the purchasing power of many currencies has generally declined, due to rising price of goods and services. Hence investors often rely on gold to counter the effects of inflation and currency fluctuations. Currency hedge Gold is employed as a hedge against fluctuations in currencies, particularly the US dollar. If the worlds main trading currency appreciates, the dollar-gold price generally falls. On the other hand, a fall in the dollar relative to the other main currencies produces a rise in the gold price. For this reason, gold has consistently proved to be one of the most effective assets in protecting against dollar weakness. Risk management: Real Assets have low volatility and it will help to reduce overall risk in the portfolio. Real assets will offer beneficial effect on expected returns. It also helps to manage risk more effectively by protecting against infrequent or unlikely but consequential negative events.

Demand and supply: Real assets like precious metals, real estate are having fixed supply. When demand increases, value of holding will increase manifold since supply is constant. Antique furnitures, vintage cars, historic stamps, and coins are also very rare and supply is limited. If more investors are shifting their interest towards real assets, it will give huge capital appreciation to existing holders. Utility Value: Real assets provide time, place, physical form and possession utility to the investor. By holding antique articles, the investor is creating time utility. Real estate will provide incremental return in the form of rental value. Personal enjoyment: Apart from economic benefits, possession of antique articles will provide personal satisfaction. It is regarded as a valuable hobby. An investor can devote his free times in this type of hobbies and he can specialize in certain class of arts.

Challenges in Real asset investments: Challenges at the time of selection of assets: Selection of real assets requires special knowledge and skill. Precious metals have to be identified by physical testing and by checking purity identification marks engraved on it. Selection of real estate is highly tedious process. Each real estate property is unique and hence it requires wide market knowledge. Brokers and mediators are also playing an important role in real estate selection. Buying commercial properties are much riskier and it requires checking the legality and title of the property with various Governmental agencies. With respect to antique articles, classic cars and toys and sculptors the investor has to segregate the original stuff from the duplicates. Challenges at the time of acquisition of assets: In the case of real assets acquisition is also breathe taking process. Unlike financial assets there are no organized institutions to finish the purchase formalities completely. Acquisition involves finishing the purchase procedure, taking careful delivery and completing all legal formalities. In the case of real estate legal formalities will be cumbersome. For arts and crafts taking safe delivery is important. Challenges at the time of maintenance (possession) of assets: Maintenance is another tricky issue in the case of real assets. Precious metals have to be safeguarded from robbery. Antiques furnitures, stamps, papers etc has to be safeguarded against ants

and pests. Maintenance of antique cars, typewriters and equipments are costly affair often loaded with non-availability of spare parts. In the case of real estate safeguarding against encroachment, periodic repairs to buildings etc are issues to be taken care. Challenges at the time of liquidation: Real assets are also called as hard assets. Barring precious metals, other real assets are suitable only for medium to long range investment. But gold and silver are highly liquid assets. Another problem in the case of disposal of real assets is non-availability of genuine buyers. Auction houses and market mediators play a significant role in finding the suitable buyers.

Conclusion: Real assets offer numerous advantages and challenges to the investors. If the investor exerts due diligence, skill and care the challenges are manageable. In the light of raising inflation and volatile stock market, Real assets are a must in an investors portfolio if he wants to play safe game in the investment world.

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