What are physical assets?
Physical assets are those which we can touch, feel and see. Real estate, commodities and gold are examples of physical assets.
What are financial assets?
Financial assets are intangible assets such as bank deposits, bonds, stocks, mutual funds etc. They have no physical presence except for the existence of a document that represents the ownership interest held in these assets.
Advantages of financial assets over physical assets
1) Liquidity-When it comes to withdrawing money from the investment, financial assets score over physical assets. Financial assets can be easily converted into cash in a short span of time. Fixed deposits can be liquidated, mutual funds can be redeemed easily and money gets credited into bank account in 1-3 working days.
On the other hand, selling real estate is not easy as it may take months and years to find the right buyer. Gold can be easily liquidated but it is ingrained in human behaviour that selling gold is a sign of financial distress. It is generally observed that people tend to cling to gold and do not sell it until it is the last resort.
2) Transparency-Financial assets are more transparent in terms of their valuation and charges involved. Their current value can be checked and tracked on the daily basis.
In the case of real estate, it is difficult to know the correct value of the property. Similar houses in the same area fetch different prices. Also, only after the deal has finally happened between the buyer and the seller, one can know the actual value of an asset.
Even in case of gold, whether it is in form of jewellery or coins and bars, the actual value is known only once it is sold. Specially in case of jewellery, the purchase price and the selling price can be significantly different due to deduction of making charges and materials used other than pure gold.
3) Divisibility -One of the many advantages of financial assets is their flexibility to be liquidated fully or partially, as per the requirement of an investor.
Physical asset like real estate cannot be sold in parts. Also, real estate usually involve large amount and has to be sold in whole, no matter how small the requirement of an investor is.
4) Taxation – Prior knowledge of the exact value of a financial asset makes it is easy to evaluate the taxation involved in the transaction, before actually completing the transaction.
Also Read: What is the role of mutual fund investors?