Stock Market is probably the only asset class that offers instant liquidity. An investor can sell shares whenever he needs money and withdraw exactly the amount he needs.
This instant liquidity is rare in investment options that beat inflation.
Fixed Deposits: Offers interest in the range of 6-7%, which is just about a percent more than the rate of inflation. But premature withdrawal will attract penalty of upto 1%, which will bring the returns below the average rate of inflation (which is around 5%). If your investment is not beating inflation, then your money is actually depreciating and not appreciating.
Real Estate: Is probably the most illiquid asset class. Selling a piece of land or an apartment quickly is difficult, especially in India. Finding a buyer and getting the rate that you want isn’t easy. Also, it could be difficult to sell only a small portion of land. Suppose your apartment is worth 50 lakhs, and you need just 10 lakhs. What would you do? You would need to sell the entire apartment and also pay capital gains tax to the government.
Debt Funds: Taxes are high if the holding period is less than 3 years. Even if the holding period is higher than 3 years, the tax is still more than ‘long term capital gains’ for equity or stock market investment.
Gold: Is easily one of India’s most preferred investment. Gold offers liquidity, but not in the jewellery form. Jewellery comes with emotions – since they are either inherited from close family members, or purchased on occasions like marriage, birth of a child etc. When emotions are attached to investments, selling them when you need money can be painful – this leads to people taking loans with high interest rates when they need money. Gold can be a good investment option as long as you buy it in solid form – If you have to buy gold, either buy gold coins or bars that do not have making charges or wastage. The other way to invest in Gold is ETF.
Compared to all investment options above, long term investors in the stock market – who have built a sizeable portfolio of good stocks – have one major advantage over everyone else. Even 0.5% of the entire investment can be sold anytime they want money. And the amount would be deposited in your bank account within 2 working days!