A recent assessment by Chartered Accountant Nitin Kaushik highlights a critical issue within Indian household finances: a significant lack of liquidity stemming from an overwhelming concentration of wealth in physical assets. According to Kaushik, the problem isn't the choice of assets themselves, but rather their concentration, which severely limits financial flexibility for many families.
The Concentration of Wealth
Data indicates that a striking 66 percent of Indian household wealth is tied up in physical assets. Real estate accounts for 51 percent of this, with another 15 percent held in gold. In stark contrast, only 5 percent is invested in equities, and 14 percent is held in bank deposits. This means a mere 20 percent of personal wealth in India is in financial assets, a figure significantly lower than in countries like the US, Sweden, and Taiwan, where financial assets often exceed 60 percent of personal wealth.
Kaushik emphasizes that while assets like property may appear valuable, their illiquid nature makes them difficult to leverage during emergencies. He explains, "You can’t sell 10 percent of your flat if you need money." Similarly, physical gold stored in a locker does not generate additional returns or "compound" over time. Building wealth, Kaushik argues, should involve owning assets that generate income or appreciate actively, rather than passively holding assets in hopes of future appreciation.
Expert Caution on Gold
Echoing these concerns, Value Research CEO Dhirendra Kumar has also cautioned investors against excessive allocation to gold, despite recent price rallies. Kumar stated that gold "produces nothing, earns nothing" and should constitute only a small portion of an investment portfolio.
The recent surge in gold prices, according to Kumar, is primarily driven by central banks, not retail buyers. He points to central banks in countries like China, India, and Turkey acquiring gold for security purposes, largely in response to events such as the freezing of Russian central bank assets. This global "de-dollarisation" trend has created an unusual scale of demand, pushing prices higher, rather than widespread retail purchasing.
Navigating Investment Choices
Both experts advise caution and strategic thinking. Kumar suggests that while gold can offer diversification, investors should avoid herd behavior and limit its share to no more than 5-10 percent of their total portfolio. He warns against buying assets when there's a complete consensus that prices will only rise, calling it a "very dangerous thing to do."
Ultimately, a balanced investment strategy should retain equity and fixed income as core components, supplemented by a modest and liquid form of gold investment for diversification and rebalancing needs.