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Comparative Study

All have personally seen that real estate investments grow manifold. 

There is always demand for real estate and historically the prices have been going up sharply. The only reason one may not have made investments in real estate is lack of funds.

On the other side people have different perceptions about mutual funds. They believe that mutual funds are very risky.

What is the fact? Is real estate actually the best or a mutual fund is a better option?

Returns in real estate:

Let us take the earlier mentioned example. Property bought in 2000 at Rs 15 lacs is worth Rs 75 lacs today. Growth of Rs 60 lacs in a matter of just 12 years, fantastic!

Ok, let us mathematically check at what rate it has grown. We know that bank deposits give - 9% per annum. How do you find how much has the property given every year? 

The property grew at the rate of 13.17% for the period Jan 2000 to Jan 2013.
Now, assume one had invested Rs 15 lacs in MUTUAL FUND for the same period. It would have made Rs 1.29 crs at a rate of 18%.

Large cap diversified equity funds tend to give higher returns compared to real estate in the long term.

Now let us look at the risks..

Only the ignorant will claim real estate is less risky than mutual funds.

The performance of both real estate and equity mutual funds as an asset category majorly depends on the performance of overall economy. If the GDP grows at 8% you can expect real estate to grow at 13-14% and equity mutual funds to grow at 15-17% in the long run.

How do we plan investments?

Do not see both real estate and equity mutual funds as mutually exclusive, meaning either real estate or equity mutual funds. If you are rich and have large surpluses then have both in your portfolio.

If you are a salaried employee, you may not have huge surplus to invest in property. Then do not take a home loan and invest in property. The best alternative will be to do an SIP in equity mutual funds; you will end up better off.

In case you want a home to live and you are under family pressure, then you can take a home loan.


Why does Investor Invest in Real Estate?

Few reasons which is why people have for investing in real estate. And here 2nd property is considered as investment:

  1.     There is mental comfort in buying a hard asset as in case of gold.
  2.     Real estate is an asset that can be funded largely through long-term loans.
  3.     Real estate assetes can be comfortably paid back via monthly payments over a very long period of time.
  4.     It also accounts for tax savings in real estate investments.
  5.     Comfort of getting a stream of rental income. Also seen as additional – passive income less property linked expenses.
  6.     Real estate is seen as it is hedged against inflation.
  7.     Mental fix that there is Zero Risk in real estate purchases.
  8.     Justification that it is an investment for the next generation.
  9.     Pride of owning multiple real estate investment and being known as the ‘Landlord’.
  10.     Due to lack to active monitor of real estate prices, investor does not faces daily mental valuation.
  11.     The perception that since everyone is investing in real estate and profiting from it, drives people.
  12.     Illogical laymen calculations work here ... like someone bought a flat for Rs 900 / sq ft 15 years ago and now it is worth Rs 5000 /  sq ft. you might think that this 900 to 5000 appreciation is more than 5 times and a very profitable one. But one shall not forget to consider that there were certain expenses had been incurred in these 15 years or in repaying loans. Actual returns should always be  calculated net of expenses.

Why Don’t People Invest in Mutual Funds?

There are many investors who avoid mutual funds and they invest in real estate.

Lets see what are the possible reasons for them to do so:

  1.     People consider mutual funds are always risky.
  2.     People do not understand the power of compounding, the power of equity as an asset class and clear knowledge of wealth building via SIP.
  3.     Lack of knowledge about asset allocation.
  4.     Unable to determine financial goals and estimate the amount required.
  5.     They have already utilized all the tax benefits available to them because of home loan.
  6.     Bad past experiences.
  7.     As daily price movement of MF through NAVs is available, the daily mental valuation of the asset, forces one to take frequent buy and sell related decisions.
  8.     Very few people talk about profits made by investing in funds and meeting financial goals through funds, so positive publicity is highly low.
  9.     People remember bad market cycles like year 2000, 2009, 2013 etc.
  10.     People are stuck with already invested money in real estate, as those investments are not highly liquid in nature.
  11.     You don’t get to hear every day that a fund having a NAV of Rs 28 has grown after 15 years to Rs 805 – a return of 25% per year. Such returns are very high ones and rare and cannot be matched by real estate investment or investments in other asset classes.

Let Us Check Past Stats ....

Do you remember how much did petrol cost in the year 2000?

It was Rs 25. As of today, it is about Rs 74. Now suppose you had invested that Rs 25 in real estate, which grew at 12.1% approx. This would have grown to Rs 139. Enough to buy 2 liters of petrol today.

Now if this was invested in a mutual fund, which somehow could manage 25% return, it would have grown to Rs 711. Enough to buy at least 11 liters of petrol. So, which investment seems more promising to you...

Have you ever thought WHAT IF you needed the money invest in REAL-ESTATE urgently..... you have to bear big loss in selling your property or even you COULD NOT find a client for the same.....

on other hand investments in quity and debt are HIGHLY LIQUID, get your money WHEN YOU NEED IT, AS YOU NEED IT.

Comparative Study