There’s an abiding belief among Indians that the only investment that can make you rich is real estate. Such is the allure of getting rich through property that many people in their twenties and thirties want to take on a large home loan and sign up for their first apartment as soon as they receive their first pay cheque.
But 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.
EMIs are compulsory savings. Without it, I will just spend the money.
The Equated Monthly Instalment (EMI) on your home loan is not an investment. It is a loan repayment where the lender earns interest off you. Let’s say you have booked a ?50-lakh apartment and taken a 10-year home loan at 10.5 per cent to fund it. The EMI will amount to ?67,467. At the end of 10 years, you would have paid a total of ?80.96 lakh to the bank, of which ?30.96 lakh will be the interest component alone!
For the apartment to be a truly good investment, it will have to generate a return over and above the ?80.96 lakh you paid for (not the ?50 lakh that most people assume). Instead, investing the same money in good equity or balanced funds will earn you a return on your capital, without incurring interest costs.
But I get to create an asset. With equities, after ten years, I may be left with nothing.
If this is your first home and you are actually living in it, it is not an asset at all, because it does not earn you any return. There has been no ten-year period in Indian stock market history when SIPs in equity or balanced funds have delivered nothing.
Between June 1992 and June 2002, which was among the worst ten-year periods for Indian markets, an SIP investment in an equity fund like UTI Mastershare delivered a 13 per cent annualised return. Again between September 1994 and 2004, a flattish period for the markets, SIPs in Franklin India Bluechip earned over 20 per cent CAGR.
That’s not enough. My friends say their property investments have gone up five or six-fold in the last seven years.
Translate that into compounded annual returns, and you will find that the returns aren’t much higher than that earned by good equity funds. To give you an example, Annanagar has been a booming locality in Chennai in the last ten years.
If you bought an apartment there at ?40 lakh in 2001 (the previous real estate downturn), it is now worth ?2.4 crore. That’s only a 13.6 per cent CAGR (compound annual growth rate). This is true across markets.
Data from the National Housing Board show that of 26 cities tracked, Chennai delivered maximum appreciation between 2007 and 2014, with the Residex for the city going up 3.55 times.
That’s a CAGR of 19.8 per cent. Markets such as Pune (241 per cent), Mumbai (233 per cent), Bhopal (229 per cent) and Ahmedabad (213 per cent) were other top ones. Their effective returns were 11.4 to 13.3 per cent.
Doing an SIP with a middle-of-the-road equity fund like the Sundaram Growth Fund for the same period would have fetched you a return of over 17 per cent; top performers would have earned you 20 per cent plus.
That’s all-India data. Some localities would have delivered bumper returns.
True, but how would you identify those localities in advance? This is the disadvantage of investing in real estate.
To make sufficient gains, you have to know not just the right state to invest in, but also the right city and locality within it. The same NHB data, for instance, shows that property prices in Hyderabad and Kochi have declined in seven years. Even in a locality, different transactions may yield different prices. To be sure, selecting the right mutual fund to invest in is difficult too. But with funds, you can invest based on the fund’s three-year, five-year or 10-year track record and can be assured that the price you are paying is right.
If you could diversify your property investments across many markets, your results would be better.
But given the large ticket sizes of property investments, most people end up betting much of their monthly pay cheque on just one piece of property. That’s concentration risk.
But I’ve never heard of anyone who became a millionaire by investing in equity funds.
Because mutual fund NAVs are available to you on a daily basis, there’s a temptation to over-trade. Most people who haven’t made money on equity funds are those who haven’t stayed on for ten years or more. They’ve bought funds, sold them and bought them again trying to time markets.
If you did the same with property investments (they have cycles too) you would lose money. Even long-term investors in equity funds invest too little in them.
A 15 or 20 per cent return from equity funds will seem small if only a fraction of your wealth is invested in it. While EMI commitments typically run into ?30,000-?70,000 a month, most people don’t venture beyond ?1,000 or ?5,000 SIPs.
We’re not recommending that you commit half or three-fourths of your monthly pay to SIPs in equity funds. But if you are in your twenties or thirties, you can certainly afford to commit 20 per cent.
Remember, once you sign up for a home loan, you can’t vary your EMI or stop paying it, if the property doesn’t appreciate or if you quit your job.
With an SIP, you can take a rain check in an emergency.
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