Capital Appreciation

Reviewed by Sweta | Updated on Sep 30, 2020

Introduction

Capital appreciation refers to an increase in the market price of an investment. Capital appreciation is calculated at the time of disposal of an investment as the difference between the sale price and the purchase price of an investment.

Understanding Capital Appreciation

Capital appreciation may occur in a variety of investments, such as equity securities, mutual funds, real estate, gold, and other commodities or tradeable investments.

For example, if an investor buys a stock for Rs 100 per equity share, and the market price rises to Rs 120, there is a capital appreciation of Rs 20 per equity share. The capital appreciation would result in a capital gain of Rs 20 per share in case the share is sold.

Factors to Consider

  1. In assets, such as equities, a capital appreciation may occur over a short period of time.

  2. In asset classes, such as real estate, capital appreciation may occur over a long period of time.

  3. Investors may invest in an asset class for capital appreciation or for earning a regular income. For example, rental income from a house vis-a-vis an appreciation in the value of the house over a 10-year horizon.

  4. Capital appreciation in various asset classes occurs for different reasons. Capital appreciation in commodities, such as gold, or industrial commodities, such as copper, zinc and the like, depends on the demand and trade factors.

Capital appreciation in equity shares or mutual funds occurs due to the financial performance of the company or enterprise, overall sectoral performance, and demand and supply of the security in the securities market. In the case of debt securities, the price also depends on the interest rate regime.

  1. In general, a capital appreciation is not taxed until the gains are realised through a sale of the asset. The tax rates applicable would depend on whether the asset is held for a short-term or long-term duration. Long-term capital gains are generally adjusted for inflation using a cost inflation index.

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