What is a Hard Asset?
Hard assets can be defined as physical items that are tangible in nature 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 basically classified as follows–
- Gold, etc.
Hard Asset Practical Scenario Example
A newly set up company involved in the production of manufacturing airplanes has come up in New York. The executive management of the company has utilized a certain amount of the infused capital to buy certain new machinery which will be used in the assembly line to produce parts of the plane. The company has also bought a huge building area for manufacturing the plane.
To manufacture the plane the company needs to buy steel and aluminum. Thus, all the assets like building, machinery purchased, steel and aluminum 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 aluminum 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 lease 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 and moreover we cannot anticipate how it will act like.
- Its value cannot be wiped out overnight like that of soft assets. When share prices fall down in bearish 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 profits like bonds and equities or mutual funds.
- It provides scope for long term gain in the form of appreciation and other rental incomes for e.g. real estate revenue.
- It provides a kind of regular income which is common for real estates which 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 benefit 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 easily available when we want to purchase hard asset as compared to soft assets
- 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 a span of 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 it country of investment whereas in case of 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 which grow over time.
- A soft asset like bonds have the lowest risk factor involved as a company or institution is legally bounded to pay the interest on the bond.
- These are difficult to sell compared to soft assets that be sold in a matter of seconds.
- Hard assets like real estates are linked to interest rate risk. 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 which a soft asset will have. Thus, convertibility to cash and cash equivalent 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 of time.
- It requires longer management and maintenance as compared to soft assets.
- This purchase involves greater legal and financial liability 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 are more when invested incorrect stock or bonds as compared to the hard asset
- It always involves huge monetary transactions for which even at times debt is required.
- This 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 are basically categorized as long term hard asset and short term hard asset
- Act as a vital substitute to hedge inflation
- They possess an intrinsic value which is subject to fluctuation.
- They may be traded in 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.
This has a guide to What is a Hard Asset & its Definition. Here we discuss the classification of hard assets along with examples, advantages, disadvantages, and limitations. You can learn more about from the following articles –