An investor should give importance to human capital and real capital while constructing his portfolio. However, this aspect is usually ignored by investors and it is also ignored by highly experienced money managers too. Due to this type of attitude, clients start taking undue high risk and then have to face the consequences. There are basically two forms of capital. One is called as “Human Capital” and the other is the “Real Capital”. Human capital deals with our self. It is because by working we generate income for us. Also a businessman generates income through his own skills. On the other hand, a salaried individual earns salary and professional earn professional income.
We have to get into the habit of dealing with real capital, which is considered to be termed as the second form of capital. Our second form of capital consists of investments in shares, fixed deposits, mutual funds, post office savings schemes etc. These are assets which generate income for our being. The second form of capital gives us capital appreciation when there is an increase in their value or return in the form of interest, dividend and rent among others. In the case of real capital, money works for us.
Initially, when we begin our career, we only have human capital with us. In other words, we work and we generate an income for ourselves. When we generate income from human capital, we work for money. However, if we convert human capital into financial and real capital, money will start working for us. But for most of us, it is difficult to convert our human capital into financial and real capital. The main reason out here is that we would rather prefer and feel it safe to use our money in our business rather than investing in shares or mutual funds. But this is a misconception and it can be considered as half through.
One should understand the fact that our business can suffer if there is a slowdown in the economy. Also, if a customer defaults on a payment, we are then likely to suffer more. Hence, it is not completely true to think that we are in total control of our business and that it is safe to invest money into our business rather than venturing into others. There are businessmen and self employed professionals who would prefer to invest their money into their own business which seems to generate maximum returns in their business or practice. However, one should be aware of the fact that it is risky to put human capital and real capital in the same basket. Imagine a situation where you suddenly realize that an untoward incident in your business has taken place. In such a situation, if you had invested your real capital, then in that case you would lose both.
I would like to conclude this article by stating that you should cease to be a human capital alone. At regular intervals, get into the habit of investing in other portfolios so that you are able to also create real capital and thus creating an opportunity of money working for you.