Real Estate Investment vs Mutual Fund Investment

All investments are good. But while you ask whether it is good for you, my opinion would be that it depends on your risk profile, investment time horizon, objective of investment, net worth, cash flow, family structure, age, health, man power, occupation and nature of job and various other subjective issues. All the above mentioned factors are unique in nature. To perceive the intended meaning, consider that all medicines are good, but we don’t take them under our own steam, instead, we consult a designated doctor as we all know that self-medication is detrimental. Unfortunately, in case of investments, we don’t follow this rule. Considering the present scenario, Mutual Fund Investment will allow you to create wealth in the long run.

I have come across the investors whose investments are mostly in real estate or they’re keener to invest in this sector without knowing their current asset allocation.

While you buy a house/flat as an investment, you may get Total Return = (Rental Income + Appreciation Value) or only appreciated value.

While you rent it out, the income that you earn will be taxed as income from house property under section 22 of the Income-tax Act. Although the entire rental amount will not be taxable, 70% will be taxable and rest 30% deductions are allowed towards the maintenance of the property. And also if you take loan you’ll get 100% interest deduction on your borrowed capital. Under section 24 of the Income Tax Act you’re allowed to claim such deductions from the Net Annual Value of your House Property.
Now if you buy a house, the minimum budget should be Rs. 50 Lakhs (including of registration).

Secondly, if you don’t have enough savings to buy a house outright with cash, you’ll borrow. Still you have to have a provision of at least a down payment of 20% although the EMI amount is not small and you don’t give a second thought about your cash flow. Yot get Net Annual Value when Municipal Taxes Paid is deducted from Gross Annual Value. In case the property is let out, its rent received is your Gross Annual Value, whereas in case of a deemed to be let out property, a reasonable rent of a similar place is your Gross Annual Value. For a self occupied house property the Gross Annual Value is Nil.

Most things sound good. All are unique. All that glitters is not gold; consider the above invisible factors that I mentioned in the beginning of this article.

But if you think an alternatives like Mutual Fund Investment, you can invest systematically (SIP) in the same disciplined manner. Let’s examine how it works:

Any lending institution asks for 20% down payment. Therefore, the loan amount is Rs. 40, 00,000 & you pay Rs. 10, 00,000 from own savings as down payment. If you take the loan for 15 years at 9.8% interest, the EMI would be Rs. 42,496. Your total outflow over 15 years would be Rs. 77, 98,583, i.e. for Rs. 40, 00,000, you’re paying total interest amounting Rs. 37,87,583.

At what price you can sale the property after 15 years? While you sale your property, you sale at an appreciated value and you pay hefty capital gain tax also. Let us assume if the appreciation is 10% (post capital gain tax including of other expenses & brokerage).

Scenario 1:  You have  rented out your property

Scenario 2: You have not rented out your property

Scenario 3: If you consider Mutual Fund Investment

Before I present you the illustration, I want to share with you that, the  BSE  SENSEX has given a return of 16.47% approximately over a period of last 37 years (since inception). Consider the performances of Mutual Fund Investment in last 15 years:

Therefore, Mutual Fund Investment return beats the return of real estate in the long run. Both equity & real estate are long term investment products. You need to change the attitude and control your emotion.

Business Cycle’s effect on Mutual Fund Investment

Note that business cycle means the cycle pattern of expansion, contraction and recovery in the economy. You can’t avoid the cycles. Put in your mind that this is a cycle and not a circle. Cycle is temporary. SENSEX, NIFTY, etc reflect fluctuations in the business cycles. Movement of SENSEX, NIFTY, etc depends on the economy.

Therefore, a business cycle occurs due to the fluctuations that an economy experiences over time resulting from changes in economic growth, which is not stable due various factors.

The problem with the investor is that he can’t absorb the market movements and thus ends up discontinuing his investments. A wise investor selects right asset class and reduces the risk and maximizes the return, by considering his aspirations.

Keep patience and invest in right asset classes in a systematic way (SIP) which is opposite to EMI. You will get rewards. Your investment strategies depend on your risk profile, investment time horizon and investment objectives etc. If you’re not an expert, you may take professional help. Just think before you take a loan since loan is too much expensive. Rather focus on your goals and then on return, with periodical review, asset allocation and re-balancing your portfolios, you can reduce risk & maximize your Mutual Fund Investment return.

It’s always advisable that before your start your investments, go for a detailed financial plan from a SEBI Registered Investment Advisor and then implement the plan with periodical reviews.

“Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.” – Warren Buffett