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What to Choose? – Mutual Funds or Real Estate?

Many of us are very comfortable with real estate as an asset class. Real estate is tangible and we feel we have full control on it. Most of us believe it to be less risky and think the return is highest and unmatched by any other asset class. The returns are unmatchable by other class,

Thousands have personally seen their real estate investments grow manifold.  A Rs 75 lacs property bought in Adyar, ( Chennai )  in 2008 is probably priced at Rs 150 lacs today. Is it not phenomenal?

But have you considered as Mutual Funds as an asset generating superior returns? Read this to understand how MF’s can be a better investment than Real Estate.

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

We will broadly look at two parameters to establish the truth; Returns and risk.

 Returns in real estate:

Let us take the earlier mentioned example. Property bought in 2008 at Rs 75 lacs is worth Rs 150 lacs today. Growth of Rs 75 lacs in a matter of just 10 years, fantastic! Isn’t?

Ok, let us mathematically check at what rate it has grown. We know that bank deposits give – 9% per annum.

The property grew at the rate of 10% for the period Jan 2008 to Jan 2013.
Now, assume one had invested Rs 75 lacs in IDFC Premier Equity Fund  G for the same period. He would have made Rs 3.48  crs at a rate of 16.67%.

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. It is a matter of perception. The matter of the fact is that both equity mutual funds and real estate both belong to the growth asset category.  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. Remember I said long run. In the short run lot of funny things happen, hence both may not be suitable.

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.

 

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Sathish Kumar

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