What is a Hard Asset?
Hard assets can be defined as physical items that are tangible, i.e., that can be touched and felt and can be owned by an individual or company for long term usage with an expectation that such assets will generate some value in the future and thus appreciate.
Classification of Hard Assets
These are classified as follows–
- Gold, etc.
Hard Asset Practical Scenario Example
A newly set up company involved in the production of manufacturing aeroplanes has come up in New York. The executive management of the company has utilized a certain amount of infused capital to buy certain new machinery. It will be used in the assembly line to produce parts of the plane. The company has also bought a large building area for manufacturing the plane.
To manufacture the plane, the company needs to buy steel and aluminium. Thus, all the assets like building, machinery purchased, steel, and aluminium are examples of hard assets. The machinery purchased for manufacturing the plane are classified as long term hard asset, and its usage is estimated for more than a year, whereas, the inventory such as aluminium and steel are considered short term hard asset as they will be consumed within a year.
Advantages of Hard Assets
- Hard Assets is considered very valuable because they are considered as the raw material to manufacture the goods or services.
- It is comparatively simple to understand as compared to soft assets. One can just buy a property and use it for his purpose or rent it out or leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.” out and also anticipate future earnings or vacancies. So such assets classes are simple in how it works when compared to soft assets like bonds or equities where the value is dependent on macro-economic factors. Moreover, we cannot anticipate how it will act.
- Its value cannot be wiped out overnight like that of soft assets. When share prices fall in the bearishBearishBearish market refers to an opinion where the stock market is likely to go down or correct shortly. It is predicted in consideration of events that are happening or are bound to happen which would drag down the prices of the stocks in the market. market, prices of stock can go down equivalent to near zero. The prices of these assets can come down with market fluctuation, but it will not get wiped out overnight.
- These are under out own controls, and we need not depend on market or someone else for its pricing, or in this case, it is not that we have surrendered the money to someone else who is making use of it to book profitsBook ProfitsBook Profit is the profit amount that a business earns from its operations & activities but has not been realized yet. It is not tracked by analysts or stakeholders & its calculation is relevant only to evaluate a Company’s tax liability. like bondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually. and equities or mutual funds.
- It provides scope for long term gain in the form of appreciation and other rental incomes, e.g., real estate revenue.
- It provides a kind of regular income, which is common for real estates; and is attractive and stable too.
- It offers the scope of diversification as these class of assets follow a trend opposite to soft assets and can thus reduce our exposure to stocks and bonds when the market of such asset class is falling.
- It provides investors an avenue to hedge inflation.
- Investing in real estate provides a source of utilizing tax benefits, which further helps to save money and increment of net worth. A person investing in real estate will receive deductions on paying property tax, interest on mortgage, depreciation, and insurance.
- Debt financing is readily available when we want to purchase a hard asset as compared to soft assets.
- It doesn’t have the record of giving the best long term returns when compared to a soft asset like stock. There are cases where money invested in a particular stock has gained 1000% to its net worth in 10 years, but when compared to hard assets, the change in 10 years was not that much.
- They don’t have the advantage of global exposures because the invested money only stays limited to its country of investment, whereas, in the case of a soft asset, one can buy/sell the investment to/from any part of the world. Thus one grown when the global economy is growing.
- A soft asset when it comes to company use provides a regular income, e.g., when one invests in bonds, it gives regular dividends that grow over time.
- A soft asset like a bond has the lowest risk factor as a company or institution has legal binding to pay the interest on the bond.
- These are difficult to sell in comparison to soft assets that sell in a matter of seconds.
- Hard assets like real estates are linked to interest rate riskInterest Rate RiskThe risk of an asset's value changing due to interest rate volatility is known as interest rate risk. It either makes the security non-competitive or makes it more valuable. . The mortgage becomes more expensive, with a rise in interest rates. Also, with a rise in interest rates, the price of the property begins to fall.
- These are non-exclusive and can be easily implemented or bought by any company. It does not help in maintaining a company’s customer base.
- Long term hard assets don’t have the same amount of liquidity that a soft asset will have. Thus, convertibility to cash and cash equivalentCash And Cash EquivalentCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. is minimal in terms of hard assets.
- It has transaction cost of hard assets are comparatively higher than that of soft assets. The high cost of the asset makes it difficult to turn a profit over a short period.
- It requires longer management and maintenance as compared to soft assets.
- This purchase involves greater legal and financial liabilityFinancial LiabilityFinancial Liabilities for business are like credit cards for an individual. In simple terms, a financial liability is a contractual obligation that needs to be settled in cash or any other financial asset and are very useful in the sense that the company can employ “others’ money” in order to finance its own business-related activities for some time period which lasts only when the liability becomes due. The liabilities could be of two types, short term and long term. both when compared to the purchase of the soft assets.
- It possesses minimal liquidity as they are not easily convertible to cash.
- The percentage return of soft assets is more when you invest in the correct stock or bonds as compared to the hard asset.
- It always involves huge monetary transactions for which, even at times, there is a requirement of debt.
- It is only restricted to their place of investment and cannot take advantage of global markets.
- The prime characteristic of hard assets is its tangibility.
- They categorize as long term hard assets and short term hard assets.
- Act as a vital substitute to hedge inflation
- They possess an intrinsic value, which is subject to fluctuation.
- They may be traded in the primary or secondary market, e.g., commodity.
- These are indirectly proportional to soft assets, i.e., when the price of soft assets increases, the price of hard assets decreases, and vice versa.
A company or individual needs a mix of both hard and soft assets, and thus both are equally important. Both have pros and cons and must be decided based on executive management’s requirements and strategy. Hard assets, though, serve long term usage for the company should be invested in thoroughly by all companies to save the company from unforeseen circumstances if faced any.
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