Do you have a fund corpus and are unsure where to invest it to gain healthy returns?
In India, people primarily use following four markets for investment:
- Buying real estate property
- Investing in the stock market and mutual funds
- Buying gold
- Keeping it in saving account or Fixed Deposits
Keeping money in saving account is a good option, but the limit should be just to meet some unexpected expenses. It is impossible to make money work for you by keeping it in saving account where the interest rate is merely 3%. To ensure that your money compounds and grows well, you need to invest it wisely.
When it comes to investment, instead of making a mixed portfolio with all the options, people in India usually look for the best choice. They look for an investment option that safeguards their hard earned money against risks. With real estate requiring large funds, they end up investing maximum part of savings in either fixed deposits (FD) or gold. But with increased awareness about other investment options like stocks, mutual funds and real estate, people now consider these as well.
If given a choice of real estate or stocks, they still get confused. For those, who find it hard to pick the best investment choice, here is a clear picture of the equity market and real estate in India.
Real Estate in India
In India, we grew up listening to the stories of properties which our ancestors bought at dirt cheap prices and later sold it at huge profits. You must have also heard your parents talking about the importance of owning a second home as an investment. In some communities in India, when parents look for a right match for their girl, they give a lot of preference to the property including land and residential buildings owned by the boy’s family. These are some of the things that keep the legend of real estate investment alive in Indian investment sector.
But you cannot make your money work for you with this conservative frame of mind. To ensure that your money has been invested well, you need to look at every aspect of both the options.
Comparison: Real Estate vs. Stock Market
In real estate, you get complete control over your investment. You can make any decision to optimize your wealth like repairs, improvements, rent and painting. while in case of stocks, someone else has the control. You are completely at the mercy of the board of directors and the decisions made by the board. At times, stock investors have to suffer due to the embezzlement done by higher level management.
If you have taken a home loan and have made down payment of 20%, your ownership in the property is up to this limit only. Now if the property value rises by 5%, your gain will be 25%. However, the bank owns 80% property any gain on the property will be yours. So even 5% rise in the property’s value gives you 25% profit on your 20% down payment. However, there is no option of compound growth in the stock market.
Risk vs. Expected Returns:
Whether it is real estate market or equity market, you need to assess risk versus expected returns. In case of the equity market, you can easily analyze risk and expected returns in near future by simply checking historical data. However, the past performance doesn’t guarantee similar performance in future it still gives you an idea of market’s performance.
As far as real estate is concerned, though you get data, comparison charts and analysis reports for location, it cannot be relied upon completely. Unpredictable changes and new laws in real estate market make it difficult to quantify risk with the past records. Impact on real estate market after demonetization is one of the best examples of uncertainty in the industry.
When investing in real estate you just need to pay property tax after possession while you can claim many deductions including the interest paid on the home loan. Further, if you sell your property and invest the capital gains in another property within a stipulated time, you don’t need to pay any tax on long term capital gains. But there is no such provision on the profits earned from the sale of shares within one year.
The regular increment in the rental rates and house prices make real estate market a safe option. Investment in property works as a hedge against inflation. Further, loan installments don’t increase with inflation you can enjoy this benefit as well.
Though price also tends to rise over time in the equity market, it doesn’t ensure the same security against inflation as real estate market does.
Real estate is suitable for people, who:
- Take pride in ownership
- Cannot sustain volatile markets
- Have more knowledge of Indian realty market
- Believe in real asset
- Prefer long term investment
The equity market is a suitable investment option for people, who:
- Don’t mind giving control to more knowledgeable people
- High risk taking power
- Can stay normal in volatile market
- Have limited capital to invest
- Don’t mind owning assets in just paper form
After comparing both the options, we reach the conclusion that to make a profitable investment portfolio you should never keep all your eggs in one basket. Rather, you need a right balance of stocks and real estate investment in your portfolio. Carefully weigh different factors, analyze your risk appetite and choose the best investment option. An experienced financial planner will always suggest, one needs to have the right balance of every investment type to make a profitable and risk-free portfolio.