You have to take the risk of identifying a good investment and wait for market support, says BALAJI RAO

With increase in income levels, high disposable incomes and dependence on lifestyle-based spending, the definition of life has gone beyond just living; it perhaps speaks of a status statement. When most real estate companies in their advertisements have started saying “just Rs.75 lakh onwards” (not surprisingly, able to quickly get bookings), it tells us the type of life people are willing to lead. Such kind of investments on a house was unheard of for an average urban family about 10 years ago. But times are changing, making home purchase more of an indulgence than a necessity.

Many of us who are now around 50 years old would rue the fact that some 25 years ago vacant sites/plots that are currently valued in lakhs or even crores were available at throwaway prices then. Interestingly, the location of such plots was considered to be off-limits then, not frequented by the local residents at all. Any locality over 10 km from the city centre was considered to be not a worthwhile investment by any standard.

Change in scene

But the same localities now have people queuing up to buy property at astronomical prices. In the early 1990s a vacant plot of 30’ x 40’ dimension priced at sub-one lakh rupees had no active buyers in one of the remotest localities of Bangalore. Now one sees people fighting to buy it at Rs.5,000 per sq. ft, which would surely make the seller run laughing all the way to the bank.

Such instances have become common but the lesson that can be learnt out of this is that time is the biggest teacher for all aspects of life. One needs to have a vision of the future prospects. Same is the case with another asset – gold. It is one of the most sought-after assets of all times and the next favourite asset after real estate investments (or is it the other way round?). In 1990 the price of 10 gram gold (24 carat, 995 purity) was Rs.3,200 which touched an unbelievable Rs.32,000 by early 2013. The ‘yellow fever’ manifested around the year 2005, with prices rising from Rs.6,100 to Rs.20,600 per 10 gram by 2011. Demand pushed up the prices along with affordability and shift in people’s lifestyle needs.

The temperament of buying gold has gradually shifted from ornament type of ownership to coins, biscuits and bars. The growth rate of gold prices has been around 25 per cent year-on-year from 2006-07 to 2012-13. Like the growth witnessed in real estate, gold prices too went up beyond one’s imagination. Here too, time has taught a big lesson of immense future possibilities.

The third asset is equities. This is one neglected asset or which most want to ignore or have only a vague understanding, and make dubious inferences. Ironically it never gets compared with real estate or gold. People almost classify the equity market as a “gamblers’ den” and think investing in stocks is only for “risk-taking” people.

Is it complicated?

If any individual thinks that undertaking risk is difficult or identifying a good investment is not his or her cup of tea, the same person may have ignored buying a vacant plot in a remote locality available at a cheap price or did not buy a gold biscuit when it was Rs.3,200 per 10 gram. In fact, all investments are complicated, why only equities?

In the 1990s the Sensex, one of the main indices of the Indian stock markets belonging to the BSE (Bombay Stock Exchange), was ruling at 1000 (as on 25.7.1990) which in July 2013 was ruling at 20000 levels. In these 20-odd years, some listed companies have given stupendous returns, unmatched by any other asset, not even real estate.

It can be confidently said that old-time investors would vouch for the wealth they had created investing in some companies, which would perhaps be equivalent to a real estate investment done in one of the prime localities in a big city. And not to forget that investing in equities does not require huge amount of capital unlike real estate which, to a large extent, still remains unorganised.

Even in equity investments, time has been the biggest consideration to create wealth. Ironically the value of fixed deposits has dropped from plus 15 per cent in the mid-1990s to sub-10 per cent by 2012-13 and the possibilities of creating wealth through risk-free assets have got nullified.

If people get swayed by the current nine per cent p.a. interest rates offered by banks, they should realise that these rates are only temporary because they are forced to stay high by the central bank to tame the inflationary trends. Once the inflation tames, the interest rates are expected to come down further, making it tougher to depend upon such investment opportunities that can only preserve wealth but cannot assist in creation of wealth.

Make a choice

It is the need of the hour that people have to start aligning themselves to risk-based investing, whether it is real estate, precious metal or equity. Investing in real estate that requires hefty capital may not be suitable for every type of individual because of affordability factors, but investing in equities or precious metal is simpler and requires less capital.

While the possibility of prices falling in real estate (as seen during 2008-09) and gold & silver (witnessed this year) is acceptable we have to start accepting that the prices of stocks too could fall. But we should not completely ignore or sideline equities.

As part of the overall asset allocation one should consider investing in precious metal, real estate and also equities (stocks and/or mutual funds). If people start investing rather than speculating in the stock market perhaps more clarity of purpose of investing will emerge. Without embracing risk, creating wealth would be next to impossible. If one is optimistic about the future, it can offer infinite possibilities.