Comparison between Stock Market Real estate and Other Investment products
Comparison between Stock Market Real estate and Other Investment products
Introduction
In today’s world of soaring prices and rising inflation, some find it hard to make ends meet while some others struggle to maintain a good lifestyle with their limited source of income. This has made people keen to look for other alternative sources of earnings. While investment seems a lucrative option for an extra income, most people remain clueless about the various options available. Every investor has his or her own appetite for risk and any rash and untimely decision can prove to be costly. We need to choose from several asset classes having varying degrees of volatility and risk-return potential.
But again, looking at too many available options on the market, it is really a tough job to choose the best among them. Though most of the people tend to earn money out of different investment avenues, each of these has its own pros and cons which one must analyse before venturing into it. While at times, due to negligence, people tend to lose their money or end up with meagre returns.
Thus, simply investing does not help, rather, a thorough research and analysis before making the investment is a must for getting good yields. Therefore, one has to weigh the pros and cons before zeroing in on the asset class to invest in. We have multiple options in terms of investing such as Stocks, Mutual funds, Real Estate, Gold etc.
Investments
There are different types of investment products available in the market. But, most of the investors want to make investments in such a way that they get sky-high returns as fast as possible without the risk of losing the principal amount. And this is the reason why many investors are always on the lookout for top investment plans where they can double their money in few months or years with little or no risk.
However, it is a fact that investment products that give high returns with low risk do not exist. In reality, risk and returns are inversely related, i.e., higher the returns, higher is the risk, and vice versa. So, let’s look at the most commonly used arenas of investment available in the market.
Stock Market Investing
When you buy shares of stock of a company, you are buying a piece of the company, thus becoming one of the owner of the company. This type of investment is also called as owner’s equity, where you share a little part of ownership of that company. When the company makes profits and increases its market capitalisation, the value of your share increases. Whenever the company make excess profit, then that will be shared among the shareholder as dividends. So, when the share value increases you can sell your shares for a higher price and make profit out of it, vice-versa is in the case of loss. There are possibilities that you may even lose the capital as you are the owner of the company.
Mutual Fund investing
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities and share the profit arising from it. In other words, a mutual fund is a mixture of different securities which is pooled together by professional fund managers so as to reduce the investor’s risk while giving higher return than the market it operates. There are three type of mutual fund Equity funds, Debt funds and Hybrid funds depending on the type of securities used for investment.
Real Estate Investing
When you are investing in real estate, you are typically buying physical land or property. You are becoming the part or sole owner of that property. With the increase of market demand and other factors, if the price of the property increases, then you can sell the property and make profit out of the investment. The real estate investment also gives interim returns in the form of rent or lease of the property. The Real Estate Investment Trust (REIT) also comes under this investment.
Gold Investment
This is one of the oldest and the most commonly used investment option in India. In this type, people buy gold ornaments or coins/bars and sell them in a future period. The investors use the price fluctuations of gold in the market to make the profits out of this investment. Recent reforms have given rise to a different ways of investing in gold than the conventional method of holding it in physical form. This comprises of Gold ETF and Sovereign Bonds which are more transparent and fetch high returns as there will not be any loss at the sale of this investment.
Bank deposits
The process of depositing your savings in the bank for a fixed period of time, so that the investment will give a return as interest is commonly known as Bank deposits. The period is pre-determined at the time of investment and the interest rate will depend on the time of investment. In this type of investment, the bank takes the liability of paying out the Fixed Deposit on the date of maturity or as per the investor requested.
Comparison of investments
Each of these investments is different to one another and has its own pros and cons. So, there are different factors that have to be considered before selecting and investment option. Following are the top five factors that the investors will analyse frequently before selecting an investment option.
Return on investment (ROI)
ROI measures the profit made on an investment as a fraction of the cost of investment. Before making any investment, it is extremely critical for an individual to look at the ROI on that investment. Different indices in stock market allow us to scientifically measure the rate of the return of stocks and mutual funds. In the case of gold and other investments, there are certain past performance data which will help us to evaluate the returns, for e.g. the Gold Index in case of gold and past interest rates in case of Bank fixed deposits.
But, when it comes to real estate, the job is a lot harder. Specific cases in certain locations have generated far higher returns that others across land, residential, retail and commercial spaces across the country. At the outset, it must be mentioned that ROI calculation for real estate investment has more variables than stocks hence, not as straightforward. With real estate, a number of variables including repair/maintenance expenses, and methods of figuring leverage, the amount of money borrowed (with interest) to make the initial investment comes into play, which can affect ROI numbers.
Investment cost
For any option, there is a cost involved in making the initial investment which has to be factored and deducted from the return. The Bank Fixed deposit is the most affordable investment with literally no cost of investment. In the case of direct equity investment, it bares the costs of brokerage which tends to be around 0.5% of the transaction value. In an equity mutual fund, it’s the fund management fees which can be a maximum of 2.5%. In the case of Gold, there will be making charges which will vary from 2.5% to 15% depending up on the make. But, in the case of real estate, you need to factor in stamp duty, registration, society charges & maintenance & brokerage. These costs vary from state to state and from transaction to transaction.
Diversification of Portfolio
The diversification of the portfolio help us to reduce the market risk by putting the investments in different industries. This is very much possible with the investments in Stocks and Mutual funds by investment in different types of securities. But in the case of real estate, gold and other investment the possibility of diversification is not there, as the total investment goes to a particular investment.
Liquidity
Liquidity means the time taken for an investment to be converted to liquid cash. Gold is the most liquid asset which can be converted into cash instantly. The next is Fixed Deposit. Stocks are less liquid that the previous two investments, but it is much more liquid than real estate which means that you have easier access to your funds. You can exit your equity investments online instantly and have access to the funds in two days after the transaction. Exiting a property investment could take upwards of 6 months. Besides this, if you have Rs.1 lakh invested in equity, you could, if necessary, liquidate Rs 30,000 at a time, while the rest continues to remain active. It is an option unavailable to real estate.
Taxation
All equity investments held for over a year in India are tax free till a gain of Rs.1,00,000 on that financial year, more that this will attract a tax of 10% whereas less than one year investment attract an 15% tax and there are no restrictions on reinvestment. Real estate investments attract short-term capital gains tax as per the income slab if held for less than 3 years and long-term capital gains tax of 20% with indexation if held for longer than 3 years. The only way to avoid this tax is to reinvest the money in residential property or in specific bonds.
Conclusion
There are other factors like Stability, Control, Involvement, Tangibility, Initial investment etc. Which have to be checked before selecting an investment option. While all the asset classes have their own merits and demerits, selecting the right investment should depending up on your risk appetite then only the investor can make the maximum risk adjusted return in long term.
Ranjith
Dilzer Consultants Pvt Ltd
Reference:-
https://www.moneycontrol.com/news/business/personal-finance/equity-debt-or-real-estate-where-to-invest-your-hard-earned-savings-2422851.html
https://groww.in/blog/real-estate-vs-mutual-funds-better/
https://timesofindia.indiatimes.com/articles/Investing-in-Real-Estate-Gold-and-Equities-A-Brief-Comparison/articleshowhsbc/47999680.cms
https://www.moneycontrol.com/news/business/mutual-funds/-1808717.html