Safest Asset Class for Wealth Creation in 2021

The year 2020 brought with it its challenges and its opportunities. On the surface, there might have been more challenges than the latter. However, it did bring about a change in the mindset of all the people in India. Everyone now wants to have Life and Health Insurance. Similarly, people understood the need to save money and invest in making sure they are better prepared for tough times. India saw an exponential number of youth joining the stock market. While the stock market is not a safe asset class, everybody tries their luck at least once.

Since the stock market was down after the COVID crash, the rise from the bottom was almost explosive, making a lot of money for everyone. But that was just a fluke. Opportunities like that don't come very often and don't last very long.

Hence, the need to find the safest asset class, either to hedge your stock market investment or as an individual option to wealth creation, needs to be known!

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Asset Class is a group of financial instruments with similar characteristics and is governed by the same set of laws and/or policies. If you think that definition is too hard to understand, you aren't alone. Let me tell you the types of Asset Classes and make this definition a lot easier to understand.

Types of Asset Classes:

  • Equity Market (Stocks)
  • Commodity (crude oil, wheat, coffee, and gold, etc.)
  • Currency (USD, INR, etc.)
  • Bonds
  • Real Estate

Things should be a lot easier to understand now. Needless to say, each asset class has its own policies, ways to invest, profit and risk. Let's understand the safest amongst these that will help you in wealth creation!

The Safest Asset Class

The safest asset class is, hands down, "Gold"! Gold is also a popular strategy amongst a certain population, as defined in our earlier Blog Post.

Silver too is the second-best option; however, gold remains the most popular choice!

Now I know some of you are thinking, all this hype about something you've known all your life, right? Also, some of you are thinking, right, as if we didn't know that buying gold is good for the long term; however, the real problem is that we don't have enough money to buy a piece of jewellery or a gold bar.

Here comes the interesting part, most people don't realize the options available to buy gold. You don't need to own an expensive jewellery piece or gold bar for wealth creation!

Let me tell you the options available at your disposal for investment in gold.

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First Option: If you are Traditional at heart!

We all understand the first option, correct? It is buying Gold in its most popular form, i.e. Jewellery, Gold bars, coins, etc.

Our families have practised this option for generations! This is still a favourite amongst most people (those that can afford it).

Pros:

  • The gold bought can be transferred to anyone easily and even gifted
  • You can choose the physical form and attributes as you like
  • It serves not just as wealth but can also be worn for fashion
  • It can be given to certain 'Loan against Gold' Banks and private organizations and hence serves as a good liquid asset
  • It also serves as a Status symbol (specially during marriages)

Cons:

  • The biggest one is the problem of keeping it locked up safely. People usually buy lockers, safes, etc., to keep it safe and avoid theft!
  • As you accumulate the physical form, the weight and space required by it keeps increasing hence adding to the cost of its upkeep
  • Taxes and making charges are extra cost given that cannot be recovered while selling it back
  • Even after buying it from a well-trusted source, the chances of always getting a pure form of gold are risky
  • The gold buyback rate is always a little less than the actual value of gold in the market at any given moment (monopoly of the gold buyers)

Second Option: Digital Asset

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No, we don't mean going the Crypto route. Gold can now be bought digitally; again, this doesn't mean just giving the order online for physical delivery!

Digital Gold is still your regular gold, but it is bought and sold online on similar platforms as stocks. There are several different apps available for buying a digital form of gold.

For example, PayTm, Google Pay, Zerodha, Groww, etc.

Here you are guaranteed 24 carat Gold!

Pros:

  • You don't have to worry about keeping the gold safe. The company you buy gold from on these platforms keeps your gold safe in centralized lockers.
  • You can invest as low as Rs. 100! How? The platforms allow you to buy any amount of gold, even going into decimal places. E.g., .001 gm gold!
  • It can be bought and sold instantly, so you receive money whenever you want, making it highly liquid during emergency funds requirement
  • No making charges involved

Cons:

  • You can definitely not use it for fashion as it only serves its purpose of wealth creation
  • It cannot be transferred to others; it must be bought and sold individually amongst the company and person
  • It cannot be used to get a loan, unlike traditional options
  • Since it is not in its physical form, you cannot choose its attributes while accumulating it

Third Option: Mutual Funds sahi hai!

We have all seen the ad - Mutual Funds Sahi Hai! Some Mutual funds go exclusively or give a large allocation to buying gold commodity to stabilize their wealth creation journey. Make sure to read whether the Mutual fund is investing in Gold, shares of a company dealing with gold (mining, buying/selling) or Gold bonds. While obviously they take the load off of your shoulders on the buying and managing side, not everyone knows the charges applicable for it.

Pros:

  • The mutual fund is managed by a professional with several years of experience; hence the risk is minimal
  • Since a lot of users pool in their resources in the mutual fund, hence the profitability increases (since the base investment capital increases)
  • No need to have a physical space to save gold
  • You don't need to track the actual price of Gold, just the NAV (the price of 1 share) of the mutual fund being invested in
  • Again, you can start as low as Rs. 500 on monthly EMIs, making it easy to accumulate
  • No gold making charges or GST when buying or selling
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    Cons:

    • You cannot choose where to allocate the money of a mutual fund, i.e. if the mutual fund decides to switch from gold bonds to buying the gold commodity, you don't have a say in it (you still can withdraw funds)
    • Mutual funds can also be shut down/frozen if the company goes bankrupt or defaults on payments (your money gets frozen along too)
    • There is an exit load (amount deducted if funds taken out too early, depends on the fund), and yearly maintenance fee (which is % of the amount you invested)
    • Tax slab is also decided basis the time kept in the mutual fund, i.e. Long Term Capital Gain (Tax % same as your actual tax slab), Short Term Capital Gain (15% flat tax rate, doesn't matter your actual tax slab)
    • It is liquid with conditions (when you sell your stake in a mutual fund, it takes approx 3-5 working days for the amount to get transferred to your account)

    Fourth Option: ETF!

    ETF or Exchange Traded Funds (What are ETF?) are becoming a popular choice these days. Mostly, due to increased interest in the stock market.

    ETFs can be invested in the same way as a regular stock of a company, i.e., you buy shares of the ETF at a lower price and sell at a higher price.

    Gold ETFs mirror the price of actual gold, but just like Mutual funds, they have their own price (which goes up and down according to gold price)

    What separates them from Mutual Funds then?

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    Pros:

    • It is managed by professionals and reflects the price of Gold and hence is not affected by the performance of the fund house
    • Again it is in digital format; hence you don't need physical space to keep it
    • Just like in a mutual fund, you don't need to track the actual price of gold, as it sets its own starting price and then fluctuates along with the price of gold
    • You can as low as 1 share of the company (the share price varies for different gold ETFs)
    • No gold making charges when buying or selling
    • Since ETFs are not affected by the financials of the company owning them, hence, minimal chance of freezing out of funds invested
    • Unlike mutual funds, ETFs have no exit load; you can take out money any time you want without any deductions!

    Cons:

    • You need to open and maintain a Demat account and a Trading account at a brokerage firm/app like PayTm, IIFL, HDFC Securities, etc.
    • Minimal yet yearly charges for trading and Demat account (can range from 400-1000 depends on the brokerage firm)
    • There is a yearly maintenance fee called the expense ratio (which is % of the amount you invested). On average, the % is half of a Mutual Fund
    • Tax slab is also decided basis the time kept in the mutual fund, i.e. Long Term Capital Gain (Tax % same as your actual tax slab), Short Term Capital Gain (15% flat tax rate, doesn't matter your actual tax slab)
    • It is liquid with conditions, i.e., when you sell your stake, the money gets credited instantly in your Demat account, however, you can only initiate a transfer to a bank account after 2 days of selling the ETF!

    Fifth Option: Gold Bonds!

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    Sovereign Gold Bonds or Gold bonds for short are the safest bet for long term investment for several reasons. They are regulated by the Central Government through the Reserve Bank of India and hence you can be assured about the safety and security of this wealth creation option.

    This option is specially chosen by people who are looking at long term investment as the usual maturing period is around 8 years! It can be sold off before too on the stock market, however, it holds some limitations like getting a lower price than the market, low volumes (hence very less buyers at any given time).

    Pros:

    • Directly regulated by the government and RBI hence safety is guaranteed
    • No need to save it as it is not in physical form
    • You cannot transfer this to anyone however, a person can be nominated to receive its benefit should anything happen to you
    • Can be sold as regular shares in the share market (however, the volume traded each day is very low so it is difficult)
    • Usually, the bonds are bought at a small discount as decided by the government but can be sold at the actual price later
    • You earn a 2.5% interest on the amount invested each year until the 8th year so the total interest earned is 20%
    • At the end of the maturation period i.e. 8 years, you receive the amount directly in your bank account at the market price of gold after 8 years, without any tax implications!!! (this is the only option without any tax implications whatsoever)
    • You can avail a loan against your gold bonds

    Cons:

    • If you sell the gold bonds on the stock market then you get paid lower than gold's actual price
    • This option is highly il-liquid because it is not easy to sell the bonds in the open market (due to low volumes)
    • The maturation period is very long and is typically not an investment option that will come to aid in times of emergency! (you can however take a loan against it)

    Too many options?

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    That's right; we are here to help you now; you will not be left out with any options or details that can create wealth for you!

    So, just as an overview, the safest asset class to invest in for long term wealth creation is gold (no brainer at this point). If you want to know the safest i-don't-have-time-to-learn-understand-or-take risks, then the last option, 'Gold Bonds', is the option you should go for. If you want the safest bet, you have to let go of the time it takes for it to mature!

    On the other hand, for the youth that usually looks for a quick buck or the maximum of 3-5 years (considered as long term these days), the best option is to buy Digital Gold in option number 2. You can go with Mutual Funds and ETFs, too, but that is for people who understand the workings of terms like exit load, expense ratio, Demat account, brokerage account, etc.

    However, we committed to making all the financial instruments easy for the youth to understand. In the coming posts, it will be our utmost effort to make all the above terms easy to understand and crystal clear!

    Do follow our Blog for more such updates as they come in hot! Also, check out the 'The Phoenix Community - 2021" page as it houses a sneak peek of all our social media platforms!