Something which not a lot of people talk about is the direct correlation of GDP with both real estate and mutual funds. Normally, an 8% growth in GDP could translate to somewhere around 13-14% growth in real estate and around 15-17% growth in equity mutual funds, in the long run.
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Real Estate vs Mutual Funds: Which is a Better Option?
As can be seen clearly from above, from a returns perspective, equity mutual funds would be a better option. Let’s try to illustrate this via the below example.
Let’s say you want to purchase a house worth 40,00,000. Assuming the interest rate to be 8.95% (current for ICICI) and repayable tenure to be of 20 years, this is how your numbers would look like.
For a loan amount of 40 lacs, you’ll end up paying 86 lacs to the bank – more than double. Add to this the maintenance fee that you’ll pay every month as well as normal upkeep charges which will come up a few times during this tenure. Add all this and you’ll be easily looking at an outlay of 90-95 lacs, over 20 years.
Let’s say you take a rented apartment and for the next 20 years, pay an average rent of 20,000 per month. Now, in the first case your EMI was 35,860. Hence, here you’re still left with 15,860, which you can invest every month in a good mutual fund scheme, which can give you around 15% of returns, over a 20 year period. (There have been funds which have generated upwards of 20% returns as well, but that’s according to the market conditions and there’s no assurance, just a good probability)
As you can see, your expected amount, at the end of 20 years, will stand at a staggering 2.4 crore. Even if you take all the accompanying factors such as inflation and the likes, you’ll still earn at least a 4-5 fold return on your initial investment.
Now, a question might be erupting in your mind that if you purchase a house for 40 lacs, the price will not remain the same. The price appreciation, in these 20 years can even take the price of the house upwards of 1cr. That’s true, but it still won’t beat the price offered in Mutual Funds. Moreover, at a price of 1cr+, you’ll first need to find a buyer, to have that money in your hands, otherwise everything will just be on the paper. Forever. Also, think about it – if someone does want to buy a 1cr house, why will he/she go for a 20-year old house, at that price?
Are you convinced now of the better investment avenue between Real estate vs Mutual Funds? Well, if you’re not, then in addition to everything stated above, there are a slew of other benefits associated with investing in equity mutual funds as well.
Minimum Investment Size
Today, you can begin investing in mutual funds with as low as Rs 100 while everybody knows the kind of investment real estate requires. Investing in real estate means you’re talking in a few lakhs, at least. Then you’ll also need some down payment money for purchasing real estate, which can range from a few tens of thousands to a lac rupees. Something which is non-existent in mutual funds.
Real estate has always been accused of being, probably the most non-transparent sector, when it comes to money matters. It has often been called the breeding ground for all sorts of scams and often comes under the limelight for all the wrong reasons.
Comparatively, investing in mutual funds is as transparent a process as it can be. All the transactions are carried out in real time and are heavily monitored. Also, pricing in case of real estate is not regulated. There’s no authority to define the price and no way to know if you’re paying a high price for a commodity.
Liquidity in Mutual Funds
Liquidity, in case of real estate, is nearly impossible. Why? Because you don’t know when will you find a buyer for your property and if that buyer will be willing to pay the price you have decided for your property. And then there’s this added hassle of new owner registration.
While in mutual funds you can get your money in the matter of a week, selling your real estate properties might take months, if not years. Also, with mutual funds you can sell a part of them for the exact amount of money you need. This again is not possible with real estate as you either keep it or sell it. There’s no in between.
(There’s also a category of mutual funds by the name of Liquid Mutual Funds)
There are a plethora of hidden charges with real estate buying. Brokerage charges, registration charges, property charges, maintenance costs, cost of property upkeep, etc. Now, investing in mutual funds bears no extra costs. Yes, expense ratio is there but you’re not paying anything separately towards it. And even that is at a minimum – usually, 1% per annum.
All in all, it can be clearly seen that there should not even be a choice to make between Resl estate vs Mutual funds. There aren’t any major gain that you can bank upon and choose real estate as your preferred investment avenue, over mutual funds.
Read this to know how to invest in Mutual Funds
The decision is yours!