Real Estate is a seriously long term where your minimum term maybe around 10-20 years before you make some serious money of it. Only in very specific cases, there is appreciation in short term, but that's a minority. If you are talking about serious money, then you need to bide your time.
One rejoinder to the above point is that when we talk of Real Estate, we should be talking of investment and not the appreciation that the flat (where one resides) undergoes. That's paper money and can't/shouldn't be liquidated. What good is an investment if one doesn't have a roof over the head?
MF is good in the short, medium and long term. The advantage of MF is its adaptability (it's not easy to sell one site and buy another as compared to selling one MF and buying another), Liquidity and ease of operation.
Since whether to invest in mutual funds or real estate was daunting me also I wanted to write about it from a long time and 2 things suddenly happened in a week which made me write this post, first, one of my reader suggested to me to write an article on mutual funds vs real estate and second is I wanted to change the perception of investors that real estate is the best investment which I realized after having conversation with one of my friend.
If you’re in your twenties or thirties, it makes more sense to invest in equity or balanced mutual funds instead. Not convinced? Here’s why.
So here is what happened in last week of month of June 2016 which made me write this post.
One of my close friend staying in my locality in western Suburbs of Mumbai named Borivali West(It could be any locality the pick one and compared it with MF) ,was discussing how he purchased his 2BHK (985 Sq Ft) flat at Rs 85 Lakhs (78 Lakhs Price + 7 Lakhs Including Stamp Duty, Registration fees, brokerage etc) way back in 2008 and the best part (according to him) was "His flat is now worth Rs 1.65 Cr and his investment has given him double the returns in 8 years".
After the explanation of CAGR, he was surprised to see that in terms of returns it is very less but still he stood on his argument. On further digging, I came to know that he took a home loan of Rs 45 lakhs and paid Rs 40 lakhs from his savings in order to buy his home.
It was the home in which he was staying so by no means it can be considered as an investment.
We both literally went into a tussle to prove our point,
He was of the opinion that investing in Real Estate Vs Mutual Fund was better and I was of the opinion that investing in Mutual Funds VsReal Estate was better.
With all facts and figures on tables finally, I won the argument which is listed below which was an eye-opener for me and it may be for you.
As on Jul 2016, his outstanding loan is 35,78,000 and he got a tax exemption of 2,00,000 from Interest which can be claimed as a deduction under Section 24 (Rs. 150000/- up to A.Y. 2014-15).
Since I selected Equity Linked Savings Funds the interest which heclaimed in Section 24 does not have an impact in my MF calculation, this is the only area where he gets an upper hand.
Let me begin with the investment strategy suggested by me which is a mixture of STP & SIP
Since he had 40 Lakhs as his investment at the time of purchasing the home it was decided to transfer the amount in Birla Sunlife Cash Plus liquid fund and an STP amount of Rs 40000 to Birla Sun Life Tax Plan. (I would have selected Axis Long Term Equity ELSS fund but in order to create a realistic scenario BSL Tax Plan was taken as it has given moderate returns.)
Transferor Scheme: Birla Sun Life Cash Plus - Growth
Transferee Scheme: Birla Sun Life Tax Plan-Growth Option
One Time Invested Amount: Rs 40 Lakhs
STP First Date: 25th of every month from 25-03-2008 till 17/07/2016
Transfer Amount: Rs 40000
By Investing Rs 40 Lakhs in 2008 in STP your money would have grown to Rs 99.37 Lakhs in 2016 at a CAGR of 12.05%
On the other hand, since he had a loan of Rs 45 Lakhs and an EMI of Rs 40000 it was suggested that he remain invested via SIP in Large Cap fund of HDFC Top 200 for Rs 40000 a month. The reason for the selection of HDFC Top 200 is because it was one the best fund recommended by most of the MF distributors.
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