Often I have been asked which is a better investment avenue: mutual funds or real estate? Well, there is no right answer for the same as the reasons could differ as per individual’s requirement and intent. If you are looking for a clear answer, then you should stop reading from here as I will not be giving you a straight answer.
It is like comparing apples against oranges. First, home is where you live. If you are thinking about buying your first property for self occupancy then it is not investment, it is your basic requirement and you should not think how much appreciation it will give you. The return from real estate depends on location, how old the property is, etc.
Let us take an example. My friend’s sister bought a flat in Ahmedabad for Rs 30 lakh. She paid a down payment of Rs 5 lakh, took a loan for Rs 25 lakh for which the EMI was Rs 23,000. Total EMI paid was Rs 41.40 lakh. This was for an investment as she was already living abroad. She gave her a flat for rent in the last five years which gave her income of Rs 10,80,000. So her cost for flat came down to Rs 35.6 lakh. After paying her EMI she wanted to dispose of the flat as she was shifting to Bengaluru. Now she needed a flat there to reside so there was no point in keeping a property in Ahmedabad. So she put the flat on sale after 10 years thinking she would get 25-30% return. So she was expecting her flat to be sold for Rs 52-55 lakh.
However, the market price for the flat was Rs 34 lakh. On top of it, she would be entitled to pay capital gain tax on profit if her flat sells for over Rs 34 lakh. Now she got some cushion when she rented her flat but what if she had not given for rent? Then the total cost would be Rs 46.40 lakh and she could sell it for Rs 32 lakh after 10 years. There is no appreciation in real estate right now. This is realistic example of last 10 years investment in the real estate.
For comparison, I have chosen worst performing fund from 2010 till 2019 and have calculated SIP with the same amount as this lady’s EMI, Rs 23,000. After 10 years, the total amount invested in mutual fund was Rs 41.40 lakh and return was approximately Rs 55 lakh. Not bad right, but there is a catch.
The timing in mutual fund was good as market was recovering after 2008 crash and so was the real estate market. But equity market saw a smart recovery and gave better returns. For 1990-2000, the price of real estate gave better return than equity mutual funds.
So it is also a question of how economic conditions are during the respective decade.
One should not have any second thoughts about buying the first house or a property for self-occupancy, whether it is with or without tax benefits. However, recent data proves that mutual funds give a better return than real estate, but again it depends on individual preferences as many diversify their portfolio by investing in real estate. So it’s apples against oranges again.
(By Dinesh Thakkar. The writer is chairman & managing director, Tradebulls Securities)