Equity vs Mutual fund vs Real Estate

Equity vs. Mutual Funds vs. Real Estate: Where to Invest?

The infrastructure sector, a vital component of India's booming economy, includes real estate, where many individual investors have parked their savings. This sector encompasses both the primary and secondary markets, with a significant presence of private investors. However, in recent years, there has been a noticeable decline in demand and property prices, particularly after the demonetization move. The government has implemented various schemes to revive this sector, as evident in the recapitalization plan announced in late October 2017, with a substantial portion allocated to infrastructure development. Given the low prices and government initiatives, prospective investors often find themselves facing a dilemma – should they invest in real estate or opt for equity/mutual funds? Each investment avenue has its unique characteristics, advantages, and drawbacks.

Current Real Estate Market:

The property market took a hit after the demonetization of INR 500 and INR 1,000 notes in November 2016. Initially, the market saw a decline in home and land prices due to the practice of paying for properties in cash to avoid taxes, but the situation improved as demand picked up. Property prices, especially in the residential sector, started appreciating. Still, investors have questions about the real estate sector's performance, especially when compared to equity and mutual funds.

Real Estate vs. Equity/Mutual Funds – Which is Better?

Deciding between real estate and equity/mutual funds isn't straightforward. There are several factors to consider, and the best choice depends on an individual's financial goals and risk tolerance. To evaluate these investment options, let's analyze key criteria:

• Past Returns: Real estate investors often believe it offers higher returns compared to other investments. However, the returns depend on several factors, including the invested amount. Returns in real estate can vary widely, making it essential to consider risk factors.

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• Risk Associated with Returns: Many perceive real estate as a less risky investment because of its historical price appreciation. However, real estate and equity mutual funds both belong to the growth asset category. Their performance is heavily influenced by the overall economy's health. If the GDP grows, real estate is expected to grow around 13-14%, while equity mutual funds tend to grow by 15-17% in the long term.

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• Transparency: Equity mutual funds operate in a regulated and transparent market, overseen by the SEBI (Securities and Exchange Board of India). They publish daily NAVs in newspapers and on their websites. In contrast, the real estate market has less transparency and operates on demand-driven pricing. While the government is working on making real estate more transparent, it's a work in progress.

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• Liquidity: Equity/mutual funds offer higher liquidity; investors can sell their holdings at any time. In contrast, real estate liquidity depends on market demand and economic factors, making it less flexible.

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• Taxation: Real estate provides tax benefits at the time of investment, but capital gains tax applies upon selling a property. Equity mutual funds offer tax benefits at the time of investment, and the gains are often tax-free for holdings exceeding one year.

In conclusion, the choice between real estate and equity/mutual funds depends on various factors, including financial goals, risk tolerance, and investment horizon. Both options offer potential returns, and investors should evaluate their individual circumstances to make an informed choice.

Ranjit Content Strategist Dilzer Consultants Pvt Ltd

References:

• MoneyControl - Real Estate vs. Mutual Funds

• Value Research Online - Real Estate vs. Mutual Funds

• IBEF - Indian Real Estate Industry

• Knight Frank - Global House Price Index Q2 2017