It’s Time to Put Fractional Investment in the Wedding Gift List
Fractional ownership secures child’s future and is a better option than popular gifting choices like gold and cars
As a parent, you want to give your child a wedding gift that they will cherish forever. With restrictions having reduced the size of weddings across the country, the savings can be channelized into assets such as gold, cash, house/flat, car etc. While these are gifts that help secure or get a good start to married life, it is worth delving into the nature of these assets to better comprehend their utility as gift options.
Backed by centuries of tradition, gifting gold is usually an essential part of Indian marriage customs. From an economic point of view, characteristics like appreciating asset value and liquidity imbue gold with an importance that other precious metals don’t enjoy.
Available mainly in the commodity form in the past, new innovations have made it easier to purchase, store and monetise gold. But this also makes it incumbent upon consumers to select the right type of gold that caters to their requirements.
- Physical gold: Allows greater control over the asset since you are in actual possession of it. There is no need to wait for the maturity date or depend on the stock market to monetise the asset. But you do need to store it safely away. Moreover, physical gold does not generate passive income in the form of interest or dividend; a key drawback.
- Gold ETFs and gold funds: Gold ETFs invest in physical gold or stocks of companies engaged in the mining or refining of the yellow metal. Gold funds, however, are mutual fund schemes that invest in gold ETFs and stocks of companies involved in gold mining, production and distribution. Gold ETFs and gold funds have an advantage over physical gold in terms of storage, price disparity and tax efficiency. But we cannot ignore the fact that gold prices tend to flat-line over longer periods of time despite seasonal highs resulting in low optimum returns.
- Sovereign Gold Bonds: These are government securities that can act as a substitute for physical gold. They generate guaranteed returns of 2.5% annually which adds to its attraction. Plus, there are no challenges of storage. But a lock-in period of five to eight years encumbers its liquidity.
The liquidity associated with cash allows the beneficiary to spend it in any way they choose, but there is always the temptation to spend the amount on unproductive assets.
Residential Real Estate
Residential real estate makes sense only if it is for personal use. At 2-3% per annum, residential rental yields in India are among the lowest in the world making it a poor choice for investment.
Personal vehicles are depreciating assets that see their value plunge as soon as they are driven out of the showroom. They also add significantly to the monthly budget through fuel and maintenance costs, making them a liability in actual terms.
Fractional Ownership: A Gift to Cherish
Fractional ownership in commercial real estate is one of the ways to secure our child’s future. In many ways it is a better option than popular gifting choices like gold and cars.
The fractional ownership model is designed to enable the participation of retail investors in commercial real estate sector, where a high entry barrier has traditionally kept them away. It divides the cost of the commercial property into smaller units, which allows retail investors to participate in the market.
With average rental yield of 8-10%, and capital appreciation of 5-10% annually, commercial real estate provides passive income coupled with a maturity amount.
On the flip side, fractional ownership may lead to vacancy risk and is also less liquid than other investments such as shares, mutual funds and gold. Leading fractional ownership platforms select pre-leased commercial property with Grade A tenants who have been carefully selected after rigorous technical and legal vetting to reduce the likelihood of vacancies. They also provide help in monetising the asset by connecting investors with bonafide buyers.
Putting Fractional Ownership to Use
Investing in a fractional ownership platform means steady gains for five-10 years. For example, an investment of Rs 25 lakh can generate a starting rental income of Rs 2 lakh per annum at 8 per cent rental yield. Assuming a modest capital appreciation rate of 5 per cent, the asset itself will be worth Rs 31.90 lakh in five years. Thus, the gain is of a total sum of Rs 41.90 lakh (rental income for five years plus current value of the property after appreciation), which can then be used to, say, finance a house.
Fractional ownership platforms deal in premium Grade A pre-leased commercial properties, which makes them a safer asset with attractive returns — ideal for gifting to newlyweds.
The author is the founder of hBits
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.