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10 proven ways to make mutual fund investments more lucrative than real estate

The individual investor should act consistently as an investor and not as a speculator

– Ben Graham

Many people consider real estate as an asset class. Most of them think that investing in real estate is less risky. They are of the opinion that real estate draws the highest returns that perhaps couldn’t be matched by any other asset class. However, when people attended our sessions, they come to know that mutual funds are an asset that could generate even more superior returns. What could be those proven ways to make mutual funds a better investment than real estate?

Many people that I meet have been comfortable with real estate as an asset class over the last ten years. Real estate is tangible, and they feel in full control also. They think it to be less risky, while the return is also believed to be the highest.

There is no doubt that lakhs of people in India have seen their real estate investments grow manifold. A Rupees fifty lakhs property bought in Gurugram in 2007 is probably priced at Rupees 2.5 crore today in 2019. Surely, this is phenomenal.

If you study the last two decades of the real estate industry, the demand has always been more than supply. This phenomenon has led to prices rising sharply. Of course, this has made the common man adopt it as an ideal investment vehicle.

Meanwhile, everyone had different perceptions of mutual funds. They believe that mutual funds are always risky. Investing in mutual funds or stocks is similar to gambling! Returns generated in mutual funds are, therefore, considered to be less as compared to real estate.

Let’s take a closer look at the facts. Can real estate be a better option than mutual funds?

I have categorized the comparison in two parameters to find out the fact:

Returns and Risks

Returns in real estate:

Let us take the earlier mentioned example. Property bought in the year 2007 for Rupees fifty lakh is worth Rupees 2.5 crores December 2019. There is a growth of 5 times in a matter of just 12 years, fantastic! Isn’t it?

I took out the financial calculator and entered the numbers.

It comes out to just 14.35% CAGR (Compound annual growth rate).

Now let’s look at mutual funds.

One of the averages of the best funds

Snapshot of Mutual Funds performance in the last 20 years
Snapshot of Mutual Funds performance in the last 20 years

At the lowest rate of 20%, the same fund would have grown to Rs. 4.64 crores.

Let’s take another example of buying a property and giving it on rent. The sole purpose is to generate monthly income.

After a lot of surveys conducted on my clients over the last ten years, the following facts were derived:

  1. The average rental income returns from the residential property are 2-4 % in
  2. That too is a taxable income!
  3. SWP from your mutual funds can easily give you a fixed income of up to 9 to 12% per
  4. Choose SWP in the manner that can give you fixed income on the 28th of every month, without any hassles like rent
  5. SWP can be chosen to provide you with consistent monthly cash flow from the very first month.
  6. In case your property is lying vacant due to some reason, you lose the rent for that particular
  7. Tax Efficiency: In the case of property, the rental income is In fact, out of SWP from your equity mutual funds, only the capital gains are payable at a nominal rate of 10%. Therefore, SWP provides you with better tax-efficient cash flow.
  8. Partial fund withdrawal is possible from your mutual fund investments while it is not possible in case of property.
  9. Liquidity: In the case of mutual funds, you can always withdraw anytime (except for exit load and income tax implications) (maximum of three days is taken to redeem the amount into your bank account). While in the case of a property, finding out a buyer at the time of selling can sometimes be a daunting task.
  10. Peace of mind: SWP from mutual funds brings you complete peace of While property issues can range from trespassing, litigation, no or delayed rent, title disputes, vacating disputes and, so on.

Furthermore, let’s understand the top nine differences:

  1. Convenience:
    Investing in mutual funds is an easy task once the three factors are understood :

    1. First, the goal for which you are investing, your risk appetite (possible to do a risk profiling test) and your time horizon have to be While investing in a property you need to do a lot of research. It can take a lot of time. However, for research in mutual funds, you can hire an independent fee-based financial planner and get an unbiased opinion on which mutual funds to invest.
    2. Investment amount: You can start with just 500 per month or a one-time investment of just Rupees 5,000/-. On the other hand, you cannot make similar investments in property.
    3. Diversification: You can diversify in mutual funds by investing in different Depending on your risk profile, goal, and time horizon, your financial planner can help you in investing.
  2. Lack of clarity: With so many real estate projects in so many cities and so many delayed projects, many clients come to me complaining about their money getting struck in unfinished That brings a lack of clarity as to when they will get back even their basic amount invested and how much profit (or loss) will they get and when.
  3. Returns-Risk: The higher the risk, the better the Simply said! One can still identify the riskier investments in mutual funds and predict their expected returns. Flexibility to then choose the returns should be linked to your risk appetite. However, it is not so in the case of real estate.
  4. Income tax Implications and Tax Efficiency: In the case of property, the rental income is However, in the case of SWP from your equity mutual funds, only the capital gains are taxable at a nominal rate of 10%. Therefore, SWP provides you with better tax-efficient cash flow.
  5. Inflation: To beat inflation of 6% currently in India, mutual fund investments in debt (7-11%) and equity (9-12%) funds can help you beat inflation.
  6. SIP vs EMI: Starting any amount, say 10% of your net take- home income, towards mutual fund investments is the easy and best way to get In mutual funds, getting to start with an amount comfortable to you and making it auto pay from your account is equivalent to an EMI. Besides, in case of mutual funds, you earn money on your money and in case of EMI (Loans), you pay the interest.
  7. Litigation: While property issues can range from trespassing, litigation, no or delayed rent, title disputes, vacating disputes, , there are no such issues in mutual funds. You can have a single account as your first name, jointly with your spouse or child. You can also have nominations facility. In case you pass away, your nominee gets the units transferred to his or her name. Here, one doesn’t have to sell the units, and only a transfer happens. This saves you from loss of capital in case the markets are down.
  8. Municipal taxes: In real estate, you have to pay yearly taxes to the respective municipal corporation for your But there are no such taxes involved in mutual funds.
  9. The simplicity of Charges: Mutual funds offer such simple charges identified as expense ratio or exit One can quickly get started in minutes. Paying fees to an investment advisor can be a minimal amount but getting an unbiased opinion for a lifetime can be a huge benefit. In the case of property, you have to pay brokerage charges to your broker every time you buy and sell. Also, you have to register your property under your name. The brokerage on property can be up to 5-7% of the local declared circle rates.

Here are various types of equity-oriented mutual funds. The risk associated with each type of equity mutual fund can be minimised if invested for a longer duration.

Returns mentioned are based on historical data and are for long-term investment tenure.

Some of the unknown charges associated with real estate investments are:

  1. Transaction Cost: The cost involved are stamp duty, appraisal fees, reality valuator’s fees, laboratory fees for checking the construction quality, fees to the lawyers,
  2. Statutory Dues: These include regularization charges, land usage conversion charges, transfer charges, development charges, map charges or documentation verification charges by various authorities.
  3. Middleman’s commission: For residential property the rate is 1- 2% of the transaction.
  4. Home Insurance: When you are buying a new property to shift, you need to get the home insurance The insurance cost depends on the size, location, value of household articles and the price of the property.
  5. Mortgage Cover: If a new property is bought on loan, one should also get additional life insurance coverage.
  6. Parking and other expenses: If the new property is a flat (apartment), you need to pay a lump sum for life or annual parking fees for parking your vehicle.
  7. Utilities: When you are shifting to a new residence, you may also be required to acquire new utility connections like electricity, telephone, cooking gas, etc.

Dear reader, it is now time to pull your socks for the next chapter since it will lay bare to you how to become a crorepati!

financial advisor in gurgaon

Taressh Bhatia is a CFPCM  cfpCERTIFIED FINANCIAL PLANNER CM and is the founder/partner of Advantage Financial Planner LLP – A firm Registered with SEBI (Securities and Exchange Board of India) as RIA (Registered Investment Advisor).

If you have Liked the blog You can read more in the book – The Richness Principles.
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