Indians have a certain fondness for physical assets such as gold and real estate. India imports an average of 700-900 tonnes of gold each year, that translates into approximatelyRs.2,000 crore of foreign exchange. Real estate investing is no different, with most urban mass affluent portfolios over-exposed to this one asset class.

There are two reasons for this. One, these are the only two asset classes that are still a sump for black money and with over 50% of the gross domestic product estimated to be in black, this money finds its way into gold and real estate. Two, financial products have not yet won the trust of the Indian mass affluent.

There are good reasons for not over-investing in gold and real estate. Gold is a good hedge against inflation but does not give dividend or interest (excluding the government’s sovereign gold bonds scheme that give a 2.75% per annum interest) and capital appreciation in gold is linked to the global commodity, oil and dollar cycles—not something an average investor can keep tabs on. Real estate is a clunky asset with high transaction costs and liquidity problems. Also, the long-term returns on real estate are lesser than what the broad market index delivers.

So what should be your real asset strategy in your money box? Gold should be bought either through the exchange-traded fund (ETF) route or through the gold bonds of the government. While buying gold jewellery, you lose 30% on making charges. Restrict gold to 10% of your portfolio and keep it largely for weddings in the family. “Someone who specifically wants to invest in gold can do so through gold ETFs,” said Suresh Sadagopan, a Mumbai-based financial planner.

Remove the one house that you live in or own as a primary residence from your money box. Restrict real estate investments to no more than a quarter of your net worth.

“Only when one has created a good base of financial assets should she look at real estate. My estimate is that it could be 25% or less (excluding the residential home),” said Sadagopan. However, Anuj Puri, chairman and country head, JLL India, said, “Considering that the asset is capital intensive, allotting at least 30-50% of one’s disposable income in real estate would be more or less de rigueur.”

This will get easier to do once the real estate investment trusts (REITs) make an appearance in India.                                           

A well diversified money box with adequate liquidity is more important than having five flats in a property market slump.