Categories
Finance

Real Estate vs Mutual funds! Must read!

“Real estate vs Mutual funds” – This is the topic which is most commonly asked by people while investing.

Last week, one of my cousins asked me to suggest whether he should purchase the property or invest in mutual funds. He has some surplus amount to invest and he can also avail the loan for the property. I recommend him as per his risk profile and investment period. This gave me a thought that like him many people would face this dilemma and hence this blog titled “Real estate vs Mutual funds ” came into existence.

Real Estate vs Mutual funds- Investment

Now investment in real estate does not mean buying a home in which you live. Investment in real estate means buying an additional house apart from where you live. You invest in additional property to earn an additional income or increase in its capital value.

Now what are Mutual funds ?

A mutual fund is a fund which is been managed by professional financial experts who invest the money in the equity markets. The money received from the investors is pooled in the fund and invested in the markets. As the money is invested in equity markets there is always a risk associated with it.

So how do we decide to invest in the case of “real estate vs Mutual funds?

Well there are certain criteria which makes you decide whether real estate is good for you or to go with mutual fund

  1. Liquidity – If the person who wants to have a liquid investment then the mutual fund is the right investment for you. Real estate is a non-liquid investment as it takes time for capital appreciation and to convert it into liquid cash.
  2. Huge investment- Real Estate requires huge investment whereas Mutual funds can be started with as low as Rs. 500 per month.
  3. Risk appetite – If you are a risk-taker then mutual funds are the right choice for you to invest. Risk is also associated with real estate in terms of legal matters, possession, and documents. Once this is cleared, then in the long-run real estate is less risky than any other investment.
  4. Steady income- While mutual fund appreciates and gives you income (especially dividend distribution mutual funds), real estate is more prominent is providing you a steady flow of income in the form of Rent.
  5. Tracking- You get to track your investment time to time which is not possible in case you invest in Real estate.

Opinion – Real Estate vs Mutual Funds

In my opinion, mutual funds are always better than real estate. The rate of returns provided by real estate in the last 10 years is around 8% whereas mutual fund had given an average return of 10-12% during the same time. Check out the table.

Real Estate vs Mutual funds

Case study

For example you purchase a property for Rs. 30 lakhs in a city that is well connected with all basic necessities. You invested your own 5 lakhs and rest of Rs. 25 lakhs was availed as a loan from Bank at 8%. Property is leased out for Rs. 10,000 per month to a tenant with an actual increase of 5% per year. He also paid Rs. [email protected]% of property value as stamp duty.

Now after 10 years, if the property sells at 65 lakhs then you would be wondering there is an appreciation of Rs. 35 lakhs and 13,83,000 income as rent.

This accounts for 48.83 lakhs return post repayment of the loan. That is almost 260% value in 10 years. But if you consider the interest payment on loan and indexation then this return is a different number.

The EMI for 25 lakhs loan is Rs. 20911 p.m. and assuming Rs. 1000 is the society maintenance charges. At the end of 10 years, one pays Rs. 17,32,835 as interest and balance principal outstanding is Rs. 17,23,515. Therefore the total amount paid as maintenance would be 1,20,000 which if invested @6% would become 1,65,000 approx. Also, the Present value of 11 lakhs rent @6% p.a is 18,41,000. The PV of Rs. 1,80,000 paid as stamp duty would be Rs. 3,22,000 @8% returns

So when one sells the property he actually earns 13,19,650(65,00,000-1723515-1732835-31,80,000+1943,000-165000- 3,22,000). If the amount of Rs. 5 lakhs + would have been invested in mutual funds, with only average returns of 8%, the fund value would have been 14,68,000 approx.

I have not assumed other expenses like maintenance and repairs for the property and other charges. Apart from this, the physical hassles of getting the tenant, paperwork, and frequent visit to the property for proper maintenance is something to check for.

But in mutual funds you just once invest and rest the fund takes care of itself.

However there are some points when investing in real estate seems feasible then Mutual funds

  1. Physical investment preference over paper/digital investment
  2. Sense of pride- Holding additional property makes one proud so this emotion could drive you to invest in real estate.
  3. No trust on market/bank- With the current scenario of bank NPS’s and markets tanking, people prefer to block their money in Real estate.

So friends next time when you want to invest in real estate please consider the

Checkout my other articles

Love matter of heart

1 reply on “Real Estate vs Mutual funds! Must read!”

Leave a Reply