30 June 2015

Roti, Kapda, Equity & Makaan

No. I am not asking you to invest in companies that sell Roti (Food), Kapda (Clothes) and Makaan (Housing). Though it would be very interesting to look at businesses and stocks of such companies.

By the way, if you are not familiar with the 1st, 2nd and 4th terms in the title of this post, then here is some help:

These three words are Hindi equivalents of Food, Clothing and Shelter. The basic human needs.

Please note that these are basic needs. These are generally considered to be mandatory and not optional.

Investing Necessary Young Generation


Now I am sure we all are quite clear about needs and desires.

If you have any doubt, then stop reading this post. Close your eyes and think.

What exactly are the things you need?

What exactly are the things you desire?

Can you live without the things you need?

Can you live without the things you desire?

An example might help here. You need food to survive. You cannot live without it. So food is your need. Now a new iPhone 6 is something that you want. You would be very happy to have it. But you won’t die if you don’t get it. It’s a desire. It’s a good-to-have thing. But not as necessary as one of your needs.

Now talking of needs, if you are only looking to fulfill your basic needs, then there is not much to look forward to in your life.


Earn. Spend (on food, clothing and shelter). Repeat.


That’s it.

It is as simple and as dull as that. A dull SIP in a proven Mutual Fund is very good for your wealth. But a dull life is not good. Mind you, by using the word ‘dull’, I am in no way trying to mean ‘Simple’ or ‘Frugal’.

As humans, we will always have desires that make life slightly more interesting than just EarningàSpending (on basic needs)àRepeating.

And investing, if done intelligently, can help improve your lifestyle. Read a post I did on the same topic sometime back as to how investing can help upgrade your lifestyle and you will know.

I know I am sounding too gyan-giving to many people right now.

But believe me….I also know that there are many (or rather majority) who have trouble even managing their 3 basic needs, leave alone desires.

I know parents who have sacrificed all they ever accumulated on education of their children.

There is absolutely no denying the fact that if one is able to even fulfill all the basic needs, then he or she is successful in life. Money and wealth are secondary. Life is much more than just about accumulating money.

But honestly speaking, we cannot deny the existence of our desires and wants. Once again I say: Needs are not optional. But Desires are optional. But we all want to have something more from life. We all want to fulfill our desires, once we are done with our needs. If not all, then atleast the ones which are well justified. Isn’t it?

My apologies….I am once again going into my Monk-Mode :-)

Side-Note: Pardon my blabbering in this post. But I had to share these thoughts with you all as I think it is quite important for those who still don’t realize it.

But now lets come back to reality…

With lifestyles becoming increasingly complex, it is becoming very tough for people to fulfill all their wishes.

Add to it the fact that most people have been financially groomed by their parents – who (atleast a majority of them) did not really understand the power of compounding and how inflation eats up your wealth. And out of those who did understand it, very few communicated it clearly to their children, i.e. our generation.

The combined effect of all this is that we now have a situation, where our generation only gets excited about making money when it seems easy to do it (Bull Markets).

And they shun away equity as soon as markets start to fall. And this is the biggest mistake, which anyone planning to become rich is making.

These people are somehow, able to get their market timings PERFECTLY wrong!

Now let me get this straight…

Once your basic needs are taken care off (and mind you it won’t be easy), only then can you think about taking care of your desires. Right?

But most of the times, the money you earn will almost never be sufficient to fund both your needs and desires. And that is where you need an asset class, where you can put your money and be almost 100% sure that it will beat inflation.

Yes. And as you have rightly guessed, this asset class is the 3rd word in the title of this post. EQUITY.

And I have intentionally put it in the third place before the word ‘Housing’. To know why, you need to read an article I co-authored with Ajay – Comparison of Investing in Real Estate and Mutual Funds.

Equity should be considered as the basic need in current times, to fund a better future and life - And sooner you realize this, better it is for you.

I can share with you numerous examples about why equity is your best bet going forward. But it is upto you to be convinced about it….

Atleast for our generation, equity is the basic need now.

You need to invest in equity. And you need to do it now. I am not talking about the short term. And don’t take this as an indication that it is a good time to invest in markets due to recent 10% to 15% correction. What I mean to say is that if you are young and still haven’t done it, then you need to start investing in equities.

Take the mutual fund route to start it. Don’t wait to become an expert investor. Just start it.

Don’t wait to pay off your education loans or home loans completely. Keep paying back your loans and also invest simultaneously. It is tough. But if you think about it and can curb your desires a little bit in short term, you can do it.

Think about it.

..........


If you think this post can help convince those who are yet to be convinced, then please share it with them. I will be glad if this post reaches those who don't visit Stable Investor regularly.

18 June 2015

How Stock Markets can improve your Living Standard – A Stunning Example!

A few months back, I attended a conference on Financial Planning in Mumbai. One of the speakers at the conference was a well known CEO of an Asset Management Company. 

What I liked about his presentation was that when everyone else was talking about financial planning for individuals, he opened his speech with a very strong statement: Warren Buffett did not do any financial planning!

And this set the tone for rest of his presentation.

Now, beware of acting on that statement alone. We are not Warren Buffett. Right?

And as an common people, we do need to do atleast some bit of planning, when it comes to money.

But the main theme of the presentation was to demonstrate the power of equities and more importantly, the real meaning of investing.



And he shared a very powerful example, which clearly showed that the stock markets do have the potential to change our living standards.

In rest of the post, I will try to recreate that example here:


Part 1:

Suppose you have Rs 8 lacs. And you want to use this money to buy a car.

Now which car can you buy in that amount?

Probably…

A Honda Amaze (a higher end version costs about Rs 8 Lacs)

Honda Amaze Prices India
Honda Amaze - A Mid Segment Car


Part 2:

Now suppose that when you were just about to go out and buy your dream car, a friend walks into your house and tells you that he is in need of money. He asks you to lend Rs 8 lacs to him.

You feel confused and slightly sad. But you lend him that money. After all, what else are friends there for?

Five years later, that friend returns you the money, but without interest. Now you have got back your Rs 8 Lacs...but after 5 years.

So now you once again make up your mind to go and buy the car.

But which car can you buy with this amount? Can you buy what you had originally planned for?

I don’t think so...if you consider inflation.

So in simple words, you cannot buy Honda Amaze, as prices would have increased in last 5 years.

Probably you can still buy a smaller car - Honda Brio (prices would have risen to Rs 8 lacs in next 5 years)

Honda Brio Prices India
Honda Brio - A Small Segment Car


Part 3:

Now suppose that this friend returns your money - Rs 8 Lacs with interest.

Now which car can you buy with this amount?

Probably you can buy your original choice - Honda Amaze

Lets assume that inflation in car prices and interest percentage given by your friend are equal.

But wait a minute...

Your friend returning money to you, with interest is similar to a bank giving interest on your fixed deposit. Right?

And many people consider bank deposits as investments. Isn't it?

But Warren Buffett said:

Investing is forgoing consumption now in order to have the ability to consume more at a later date.

And I repeat, with emphasis:

Investing is forgoing consumption now in order to have the ability to consume more at a later date.

Key points in this quote by Buffett are:
  1. forgoing consumption now
  2. consume more at a later date

But as seen in Part 3, you are only able to buy a car (Amaze), which you were capable of buying even 5 years back.

So in a way, you are not capable of consuming more in future when you put money in fixed deposits in banks. Even though you sacrificed buying it in present.

So what would you like to have if you forgo present day consumption to invest? If we go by the definition of investing given by Buffett, you should be able to buy more.

In this case, you should be able to buy a car bigger than Honda Amaze. Isn’t it?
May be you should be able to buy a Honda City, worth Rs 13 Lacs (in today’s price).

Honda City Prices India
Honda City - An Upper Segment Car


Or if you can wait more, say 7 years…then probably you should be able to buy an even bigger high-end luxury car like.... Honda CRV (today’s price Rs 22 Lacs).

Honda CRV India Prices
Honda CR-V - A luxury SUV

But putting your money in safe deposits will not increase its buying power. It will at most be a good option to preserve that buying power.

Only equities offer the potential of turning Rs 8 lacs to something more than Rs 13 lacs, which can help you buy a bigger car.

And that is the real power of investing in equities. You can improve your living standards and not just maintain your living standards.

Powerful thought. Think about it.

Note 1 – The car brand and models used in this example are only for illustrative purposes.

Note 2 – Please don’t think that I am promoting any high-end product, brand or AMC here. This example is primarily about how equities are better store of purchasing power than safer options like fixed deposits, etc.

13 June 2015

Living Paycheck to Paycheck? Solution: Treat Savings as Monthly Bills

A reader (whom I will not name to protect his identity), shared his question in the Financial Concerns Survey:

I am unable to save any money. It is really tough. And it is not that I don’t know the benefits of saving or investing. But even then, I am not able to do it. Every month, all I can manage is to pay my ever-growing bills. Nothing more.

And in past few years, the regular payments I have been making to repay Credit Card debt has also been rising steadily. This once again adds to the fixed monthly bills I have to pay.

How do I get out of this cycle of living paycheque to paycheque? How do I start saving for future?

Now this is a very common personal financial concern. How to save? Leave alone investing. Lets keep it very simple for now. How do we just start saving?




Lets see what exactly is happening here…

This person gets his salary every month. He pays out EMIs (car loan, housing loan, etc.). He purchases all the regular household essentials required for home. He pays fees for his kids. He pays his Credit Card Bills. He takes out his family twice or thrice every month for outings and entertainment.

And then…month end comes. 

He checks his bank account and as usual, is disappointed to see a very small percentage of his monthly income remaining in his account.

He resolves to be a better spender next month. He resolves to save and invest from next month. And this has been happening for quite sometime now.

This was just a sample of how his money flows in and out every month. It can be different for different people. But this gives a rough picture of what generally happens every month in households.

But important point to note here is that the intention of saving (and investing) comes after all making provisions for all the known expenses.

And theoretically speaking, it is wrong.

I know it is easy for me to say it because I am just writing about it. But when one gets bills every month, the first reaction is to clear it off and then think about saving anything.

But you need to understand. Bills are there because of your past actions. But savings are there for funding your future actions.

You can continue denying that you don’t have money to save, after you have already spent all on other expenditures.

But isn’t the responsibility of securing your future rest with you?

I think it does.

Nobody will come and tell you to save and invest for your future. As for writers like me, we will only try to help you get convinced about it. But that is the maximum we can do.

Eventually its you who needs to find a way to save…no matter what. Think of it. You can choose not to save.

But if you don’t, then after some years when your non-earning life starts, how will you find the money to survive? Who will pay for you and your health?

Now you must be getting the picture I want to show you…

Nobody wants to start their retirement with less-than-sufficient amount. And just think of it….what will you tell yourself when you are 60 years old?

‘I could not save when I was young because I was busy spending money on things which were not worth spending on.’

Couldn’t have been sadder than this…

So what can you do? Or rather what should you do to change all this?

I have some thoughts which I think you can tweak according to your own situation and use:


Step 1: Change Your Thinking

I have written about this earlier also in this article, and am doing it again. You not being able to save money, is your own problem. Nobody else's.

But who will be affected by it?

You (in your future).

So you need to tell yourself that you will do it. You will save every month. And even if it means that you need to cut down on few expenses.


Step 2: Treat Savings as Monthly Bills

Surprised by this statement?

But I am telling you that you won’t be able to save unless you start treating your savings as monthly bills. Bills, which cannot be defaulted. Think of it as something which if you don’t pay, someone will come after you. Just like loan recovery agents.

I know its tough. In case of loan EMIs, you have signed legal contracts, which forces you to pay up every month. But you need to think on same lines when thinking about saving. 

You need to come up with an imaginary legal contract, which forces you to fund your savings every month. Think of it as your monthly savings is your additional EMI.


Step 3: How much to save?

Now this is something which only you can answer. You need to honestly evaluate your current expenditures in details. You need to figure out whether there are some expenses which you can avoid? 

For example, if going out with you family everytime costs you around Rs 1500, and you go out about 4 times a month…can't you reduce it to 3 times a month?

That will release an additional amount which can flow into your savings?

And I am telling you, that every month there are some miscellaneous expenses which are recurring in nature. But these expenses are more about greed (desires) and less about needs. Generally, some of them can be eliminated. So do this exercise. Have a look at all your expenses for past few months and I am sure you will find some expenses, which you now will find were totally unnecessary.


Step 4: How to do it exactly?

The first thing you need to ensure is that you have about 6 months worth of expenses with you as Emergency Fund. If you don’t have it, then it’s a big mistake. You can never be sure of what might happen tomorrow.

And if in case of emergency, you have to sell your investments, then you will break the process of compounding – simply speaking, you would not become as rich as you could have become.

So lets divide the word Savings into 2 parts:

Savings & Investing.

Right. These are not same. Saving is for short term and Investing is for long term. Personally for me, anything less than 5 years is short term.

So this is what you do exactly:
  1. Start putting some money aside every month in a recurring deposits. Keep on doing it till you have about 6 months worth of expenses saved in it. This is your Emergency Fund.
  2. Once you are done with the above or are close to achieving your 6-Months Emergency Fund, try saving some more amount in Fixed Deposits or Recurring Deposits. I know a lot of people will be against this approach as I could have very well suggested going for mutual funds. But I don’t consider Emergency Funds as Savings. So once you are done with accumulation of your Emergency Fund, you still do not have any savings. Right? So you need to save.
  3. Now once you have accumulated money in your emergency fund and in your savings, time is right for moving on to investing. Investing is what you do when you don’t need the money for more than 5 years. It is done for long term goals like Retirement, Children’s education etc. You can start with a small SIP. And slowly and steadily, keep increasing your SIP amounts every year.
  4. Frankly, a very small SIP may not be able to help accumulate large amounts of money for retirement. But over a period of time, as and when you reduce your unnecessary expenditures and your income also rises, you can increase your SIPs and see its amazing rewards. It can even help you pre-pone your retirement plans! Isn’t it a dream come true?

I have already written quite a long piece. So I better conclude it now… :-)

So here is another fact which will deter you from starting. When you take the above approach, its possible that you will be demotivated to see the slow pace of savings and investments growth. But don’t worry. This starts slowly but eventually snowballs into something big. 


Another thing which might come to your mind is that you should rather start saving and investing, when you are free from you’re your loan EMIs.

Personally I don’t think that it is advisable to do it. No matter how small the savings are, please start it even if you have a loan running. By not saving early, we pay a huge price by accumulating a much smaller corpus than what would have been possible, had started early.

So that’s it from me…

Do share your thoughts on treating Savings as a monthly bill and SIP as a monthly EMI. Or if you think this approach can be tweaked or if there are any ways of increasing savings, then you can share those too.

4 June 2015

Mutual Funds Vs Real Estate - Which is better for Investing in India?

Real Estate or Mutual Funds? This might be one of the most controversial debates I am starting on Stable Investor. But I had to write about it someday. And by the number of mails I receive from readers asking me to answer this question, it seems that there is much more than just financial logic behind this question. Peer pressure, family pressure and just getting done with this big decision in life are some, which I can think of right now.

Note – This post is a combined effort by Ajay (who has previously authored interesting posts like how to invest your surplus money and how he created a corpus of Rs 3.7 Crores in just 10 years) and myself.

But if you expect us to give you a clear answer at the end of this post, then please tone down your expectations. We do not intend to provide a thumb rule or even a judgment for that matter.

This question of whether you should invest in Real Estate (for investment) or Mutual Funds, can only be answered by you and you alone. This article should ideally be read in that spirit.

Property Vs Mutual Funds


So lets go ahead…

In words of Ajay, a home is a place to live and it should not be linked to one’s investment strategy. There should not be any second thought given about buying your 1st property for self-occupancy whether with or without tax benefits.

My take on this question is not as strong as that of Ajay. But I do agree with him about the power of equities in the long run. As far as my real estate is concerned, I am still weighing my options and am yet to finalize my long-term real estate strategy. As of today, I don’t own any personal property but my family does have a house in our native city.

So why am I delaying this decision unlike many of my friends who are already paying hefty EMIs every month?

To be honest, it’s about a personal choice where I have chosen to build a small portfolio of stocks and equity MFs, before I go in for real estate.

I know it might sound odd to those who believe that one should invest in property starting with the very first salary they get. But I am sorry… I don’t belong to that school of thought. I have full faith in power of compounding and investing in equities. And I will only buy my first piece of real estate when I am comfortable enough to service my EMIs. I don’t want to have myself stuck in years of paying EMIs where I feel burdened at the end of every month. I don’t want to be slave of my EMIs.

But that was about me and my philosophy…. :-) So you can ignore it…

And for those who think that instead of paying rent, its better to pay EMIs – I have an answer. Paying rent might seem like an expense. But EMI also has a significant component of interest, which even in accounting term is nothing, but Expense. So this argument does not stand completely true.

Once again I repeat that the objective of this article is to highlight the differences in returns earned by investing in mutual funds and those earned by investing in a home funded through a loan, in the name of investment and tax-saving.

We have tried comparing two cases:

One where investment is made in real estate and other where it is made in mutual funds.

So here it is…


Case 1: Real Estate Investment

Following is the data being used

Value of Property = Rs 75 Lacs (1500 sq ft @ Rs 5000/sq ft)
Required Initial Down Payment (@20% of Property value) = Rs 15 Lacs
Loan Availed (for remaining 80%) = Rs 60 Lacs
Loan Tenure = 20 Years
Loan Interest Rate = 10.15%

Few more administrative costs are as follows:

Loan Processing Charges & Other Expenses (@2% of Property) = Rs 1.5 Lacs
Registration Fees (@10%) = Rs 7.5 Lacs

After doing some calculations which are depicted below, we arrived at quite interesting numbers.


India Real Estate Investing Analysis
Click To Enlarge

Interest Paid over 20 Years = Rs 80.30 Lacs

And as you can see in the last column in table above, this property has also been able to generate post-tax and expense adjusted rental income. We used a few assumptions for rental income and expense which are as follows:

  • Rentals increase by 5% every year
  • Rental income from property is taxed at 20%
  • Maintenance expenses are recurring every 5 years: Rs 1 Lac (5th year), Rs 1.5 Lac (10th year), Rs 2 Lacs (15th year) and Rs 2 Lacs (20th year)


All in all, these result in an amount of Rs 24.67 Lacs being generated from the property over a period of 20 years.

This means, that effectively the property costs about Rs 1.39 Crores as depicted in table below:

India Real Estate Profit 2015


Now as per general perception (at somewhat backed by data too), the properties are known to appreciate in price. But here, we are not talking about property prices doubling every 2-3 years. We are talking about much sensible returns ranging from 9% to 12%.

Lets see what this part of the calculation leads us to:

We will evaluate 3 scenarios where property appreciation is taken as 9%, 10% and 12% continuously for 20 years. And this evaluation is depicted in table below:

India Real Estate Investing


To summarize the above calculations, this property initially cost Rs 75 Lacs. But since loan was taken and it also generated rental income, the total landed cost was Rs 1.39 Crores.

Now when 3 different scenarios are considered where this property appreciates by 12%, 10% and 9%, the expected net gains are Rs 5.1 Cr, Rs 3.4 Cr and Rs 2.75 Cr respectively.

Agreed that these are some really big numbers.

But before you start putting your hands on your mouth after reading them, lets check out the second case where we evaluate similar investments in mutual funds.


Case 2: Mutual Fund Investment

We are using the following data for this case:

Initial lumpsum investment in MF schemes of Rs 24 Lacs. This amount is equal to the sum of Initial Property Down Payment (Rs 15 Lacs), Registration Charges (Rs 7.5 Lacs) and Loan Processing fees (Rs 1.5 Lacs).

Now the EMI amount in earlier case was Rs 58,459. This amount in this case can be used as monthly SIP. But we also need to consider the tax benefit of Rs 1 Lac availed on house loan investment – which is to be equated monthly. That amounts to Rs 8333 and resultant amount available for monthly SIP is Rs 50,126.

So here is the calculation sheet for two types of investment scenarios.

First one is where returns from MF move from initial 12% to 7% in later years. These are conservative numbers when compared to returns given by really good MFs.

Conservative Mutual Fund Investor


Second one is a slightly aggressive returns assumption based analysis. Here the returns move from 15% initially to 7% in later years. But even then the returns of 15% are not that rare and have been achieved by quite a few funds in India for decades.

Aggressive Mutual Fund Investor


Now what happens when these funds are sold after 20 years? There wont be any tax as long term capital gains is not taxed in India for stock market returns.

So for an investment of Rs 1.44 Crores (lump sum + SIP of 20 years), a corpus of Rs 10.28 Crs and Rs 7.06 Crs has been achieved. And mind you, this return has been achieved despite having paid the additional tax @ 8333/- per month for 20 years. And these numbers are substantially higher than the real estate investment even after tax saving.

This means a net expected gain ranging from Rs 5.61 Crs to Rs 8.84 Crs.

Compare these numbers with those of Real Estate case and you will understand what this article is trying to point you towards.


Why do People Invest in Real Estate?

We have tried to list down a few reasons which we though people have for investing in real estate. And here were are not talking about the 1st House but about the 2nd property, which is treated as an investment:

  1. There is mental comfort in buying a hard asset that you can see and feel (also applicable to gold).
  2. It is an asset that can be funded largely through long-term debt (75% Funded by banks). No other asset provides such a benefit.
  3. It is a big asset, which you can acquire and then comfortably pay back via monthly payments (EMIs) over a very long period of time. Once again, no other asset provides this benefit.
  4. The comfort we get by doing mental accounting about tax savings in real estate investments. One always feels happier when one is told that they don’t need to pay tax or no money would be deducted from salary, because of tax savings due to loan-funded real estate investment.
  5. Second income from spouse, which can be used to get additional tax benefits (by being a 1st home loan for the spouse) by taking a home loan.
  6. Comfort of getting a stream of rental income. An income, which you get without working for – passive income. But most of the times, people forget about the linked expenses.
  7. General opinion that it is a hedge against inflation.
  8. Mental fix that there is Zero Risk in real estate purchases (in reality, there are more risk than most other investments like gold and mutual funds).
  9. Justification that it is an investment for the next generation(s).
  10. High return expectations due to the recent past records (say last 15 Years).
  11. Black money at work!!
  12. Pride of owning multiple real estate investment and being known as the ‘Landlord’.
  13. As there is no daily ticker, the daily mental valuation of the asset does not take place.
  14. Mental satisfaction and happiness when disclosing to others that you own multiple properties.
  15. The perception that since everyone is investing in real estate and profiting from it, even I should do the same and make easy money.
  16. You always hear story from neighbors that they bought a flat for Rs 900 / sq ft 15 years ago and now it is worth Rs 5000 / sq ft. Here mental maths comes into picture. Mentally you might think that this 900 to 5000 appreciation is more than 5 times and a very profitable one. But neighbors comfortably forget to tell you about the expenses they incurred in these 15 years or in repaying loans. Actual returns are always calculated net of expenses. Its neighbor’s envy and owner’s pride (copied from an old Onida TV advertisement). For those who want to turn Rs 900 to Rs 5000 in 15 years, it’s not that tough. You can do it at 12.1% per year.


Why Don’t People Invest in Mutual Funds?

Since you are reading Stable Investor, chances are high that you would be a mutual fund investor. But there are many who avoid mutual funds to invest in real estate. Lets see what are the possible reasons for them to do so:
  1. Lack of knowledge about mutual funds and equity markets.
  2. Lack of understanding about 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. Risk and loss aversion.
  5. Unable to determine financial goals and estimate the amount required.
  6. They have already utilized all the tax benefits available to them because of home loan. Now they have no tax-incentive to invest in mutual funds. And hence they don’t do it!
  7. Bad past experiences. And these are primarily due to wrong fund selection or wrong time horizon or wrong advice (like combining insurance and investment or wrong thinking that saving and investing are same).
  8. 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. This is driven by general lack of patience in investors.
  9. Mutual Funds cannot be funded through Black Money.
  10. Unlike real estate, no long-term loans are available for investments in mutual funds.
  11. More people talk about losses made by investing in funds (for whatever reasons) and very few people talk about their success in meeting financial goals through funds.
  12. Mental fixation with recent huge loss events (like 2000, 2009, 2013 etc.)
  13. A major chunk of saved money has already gone into real estate, which leaves almost no money to invest in mutual funds.
  14. And as substantial money is not invested regularly in mutual funds, one does not feel that substantial money can be made through mutual funds.
  15. 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 (Check Reliance Growth Fund). Such returns are very high ones and rare and cannot be matched by real estate investment or investments in other asset classes.
Now lets test your memory...

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

It was around Rs 25. As of today, it is about Rs 66. Now suppose you had invested that Rs 25 in real estate, which grew at 12.1% as mentioned few paragraphs earlier. 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. 

That is how equities work. That is how compounding works. That is how value of your money is preserved and increased by investing in right asset class for long periods of time.


Concluding Thoughts

And this is a repetition of earlier statement. One should not give any second thought about buying your 1st property for self-occupancy, whether it is with or without tax benefits.

However, based on our comparative analysis above (and estimated returns), one should think twice (or even ten times…) before buying a second home for investment purpose. One should carefully weigh all the available data and then take a wise call. Just because your friend or family member is investing in real estate does not mean that you should also do it. You should evaluate your own financial goals and think about how you plan to achieve it, and then decide whether you want to ‘invest’ in real estate or not.

A hard and physical asset will always give a huge mental comfort and satisfaction over other financial assets like mutual funds. But it is also true that it may not always be the best available investment option. In fact, investing in house funded through loan, is a huge long-term liability - which chokes the ability of the person to save and invest in other right instruments for future.

In our opinion (and it is ours and you can ignore it), after purchase of the 1st property for self-use, if there is any surplus cash left to invest, you should invest it as per your asset allocation (which includes debt, equity, gold & real estate). If the asset allocation permits you to invest in real estate, you may very well do it. But if it doesn’t, then you should refrain from investing in it. Investing in real estate for the sake of saving tax may not be the best thing to do.

As stated at the beginning of this article, this is one hell of a controversial debate. And there is not straight-forward logical answer to it. There are no thumb rules or any other rules. The question of Real Estate Vs Mutual Funds can only be answered by you an you alone.

We have simply made an attempt to clear the myth that “Real estate investing is the only best Investment Option” available for everyone. We have done all the calculations by estimating the returns net off expenses. We cannot just ignore expenses like those who just tell you the number of times their property has appreciated in value.

Please note that this post may be biased towards Mutual Funds investments.

Do let us know about your thoughts on Real Estate vs. Mutual Fund debate.


Disclaimer:

Returns mentioned in this post are only assumptions and not guaranteed ones (for both Mutual Funds and Real Estate). While there is investment return record available for mutual funds, we could not get a credible investment return data for real state (we took NHB data as guideline). Moreover, the real estate returns vary vastly from location to location.
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