Tuesday, 19 July 2016

Real Estate vs Mutual Funds-Which is Better Investments?

Mutual Funds Vs Real Estate is a very interesting question that seems to haunt most of the 20+ and 30+ somethings (including yours truly). My answer to your question is both.

Real Estate is seriously long term where your minimum term may be around 10-20 years before you make some serious money of it. Only in a very specific cases, there is appreciation in short term, but that's a minority. If you are talking about serious money, then you need to bide your time.

One rejoinder to the above point is that when we talk of Real Estate, we should be talking of investment and not the appreciation that the flat (where one resides) undergoes. That's paper money and can't/shouldn't be liquidated. What good is a investment if one doesn't have a roof over the head?

MF is good in short, medium and long term. The advantage of MF is it's adaptability (it's not easy to sell one site and buy another as compared to selling one MF and buying another), Liquidity and ease of operation.


Since whether to invest in mutual funds or real estate was daunting me also I wanted to write about it from a long time and 2 things suddenly happened in a week which made me write this post , first, one of my reader suggested to me to write an article on mutual funds vs real estate and second is i wanted to change the perception of investors that real estate is best investment which i realized after having conversation with one of my friend.

mutual-funds-vs-real-estate

If you’re in your twenties or thirties, it makes more sense to invest in equity or balanced mutual funds instead. Not convinced? Here’s why.

So here is what happened in last week of month of June 2016 which made me write this post.

One of my close friend staying in my locality in western Suburbs of Mumbai named Borivali West(It could be any locality the pick one and compared it with MF) ,was discussing how he purchased his 2BHK (985 Sq Ft) flat at Rs 85 Lakhs (78 Lakhs Price + 7 Lakhs Including Stamp Duty, Registration fees, brokerage etc) way back in 2008 and the best part (according to him) was "His flat is now worth Rs 1.65 Cr and his investment has given him double the returns in 8 years".




You will find many idiots like him who simply calculates the returns on point to point basis and not in terms of CAGR. If you calculate the returns in CAGR it is hardly 8.64%.(see image above)
 
Must Read : Top 3 Large Cap Fund to Invest in 2016 via SIP

After the explanation of CAGR, he was surprised to see that in terms of returns it is very less but still he stood on his argument. On further digging i came to know that he took a home loan of Rs 45 lakhs and paid Rs 40 lakhs from his savings in order to buy his home.
It was the home in which he was staying so by no means it can be considered as an investment.
We both literally went into a tussle to prove our point,
He was of the opinion that Investing in Real Estate Vs Mutual Fund was better and i was of the opinion that investing in Mutual Funds Vs Real Estate was better.
With all facts and figures on tables finally i won the argument which is listed below which was an eye opener for me and it may be for you.





Source : magicbricks.com
 
Source : Magicbricks.com


The above images shows the price trends in Borivali West locality in Mumbai from Jan-Mar 2008 till Apr-Jun 2016.
In the first image prices were hovering around 8000 Rs per Sq feet in 2008 and in 2016 it is near about 18000 per Sq Ft.

Below is the interest calculation for home loan of Rs 45 Lakhs at 10.5%
As on Jul 2016 his outstanding loan is 35,78,000 and he got tax exemption of 2,00,000 from Interest which can be claimed as a deduction under Section 24 (Rs. 150000/- up to A.Y. 2014-15).
Since I selected Equity Linked Savings Funds the interest which he claimed in Section 24 does not have an impact in my MF calculation , this is the only area where he gets an upper hand.

Must Read : Best 3 Midcap Churning Money For Investors  
Let me begin with the investment strategy suggested by me which is a mixture of STP & SIP 
Since he had 40 Lakhs as his investment at the time of purchasing the home it was decided to transfer the amount in Birla Sunlife Cash Plus liquid fund and a STP amount of Rs 40000 to Birla Sun Life Tax Plan. (I would have selected Axis Long Term Equity ELSS fund but in order to create a realistic scenario BSL Tax Plan was taken as it has given moderate returns.)

Transferor Scheme : Birla Sun Life Cash Plus - Growth 
Transferee Scheme : Birla Sun Life Tax Plan - Growth Option
One Time Invested Amount : Rs 40 Lakhs
STP First Date :  25th of every month from 25-03-2008 till 17/07/2016
Transfer Amount : Rs 40000
Calculations are shown in the image below 
real-estate-vs-mutual-funds
By Investing Rs 40 Lakhs in 2008 in STP your money would have grown to Rs 99.37 Lakhs in 2016 at a CAGR of 12.05% 
On the other hand since he had a loan of Rs 45 Lakhs and an EMI of Rs 40000 it was suggested that he remain invested via SIP in Large Cap fund of HDFC Top 200 for Rs 40000 a month. The reason for selection of HDFC Top 200 is because it was one the best fund recommended by most of the MF distributors.


SIP of Rs 40000 invested from 25-03-2008 till today date would have grown to 73.39 Lakhs compared to an investment of Rs 40 Lakhs

So lets do the maths now 
STP one time investment : Rs 40 Lakhs 
SIP Invested amount        : Rs 40 Lakhs 
Total                                  : Rs 80 Lakhs  
 
STP amount as on 17/07/2016 : Rs 99.37 Lakhs  
SIP Amount as on 17/07/2016  : Rs 73.40 Lakhs
Total                                           : 1 Crore & 72 Lakhs 

Wealth generated from these 8 years would be enough to buy an apartment in our area (may be in your area) and
the best part is without any home loan.
Still my friend is paying outstanding home loan of Rs 35.78 Lakhs with interest.
We middle class people end up paying home loan for 20 years,at the end of our life all we have is a just a home and then again an educational loan for our children.
We should have enough money that bank should come to us for deposits rather we going to bank for loans 

Must Read : Best ELSS Tax Savings Funds to Invest in India in 2016 for Long Term



But you will save you have never heard of anyone who became a millionaire by investing in equity funds.
Because mutual fund NAVs are available to you on a daily basis, there’s a temptation to over-trade. Most people who haven’t made money on equity funds are those who haven’t stayed on for ten years or more. They’ve bought funds, sold them and bought them again trying to time markets.
If you did the same with property investments (they have cycles too) you would lose money. Even long-term investors in equity funds invest too little in them.

IN A NUTSHELL

It is now knownn that the Indian property market attracts a lot of cash money and with the government's new anti-black money initiatives in place, the property market is going to be further impacted. This makes investing in financial assets such as mutual funds increasingly attractive; not only can you invest with maximum convenience (sitting at your computer and hitting a few keys to initiate the investment), mutual funds have the potential to offer attractive investment returns thereby helping you build your wealth.

Apart from the above, once you sign up for a home loan, you can’t vary your EMI or stop paying it, if the property doesn’t appreciate or if you quit your job.
With an SIP, you can redeem them in an emergency.
Buying a home for the first time or investment in real estate is truly a personal choice.
Awaiting for your comments my friends



About the author
Vipul is a software sales professional for Asset Management Companies, Pension Fund and Stock Brokers from last 16 years. 

Vipul believes that the amount of financial information flowing our way is probably 10 times more than what it used to be 15 to 20 years back due to the advent of newer forms of communication.
All this information is creating an information overload in the minds of individuals resulting in analysis paralysis and he helps them select the right decision while creating a Goal based financial plan.
In case if you need a Financial Plan please connect to him on vipuls1979@gmail.com
 
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