Real Estate vs Mutual Funds
“Put your money in land, because they aren’t making any more of it.”
A famous quote that many people believed in. People could not stop bragging enough of how their land and houses which cost peanuts before, were worth so much in a few decades. We’ve all heard the stories and rantings, but is it really true? Mr. Will Rogers, the famous American actor, made this quote in April 1930; over 80 years back! Since then there was a World War, India gained independence from the British and went through fourteen Presidents. How relevant are his words in our present scenario?
Most of us are familiar with the past stories of real estate; how a piece of land in the 60’s cost peanuts and is now worth a thousand times more but is that the story? Real Estate is still considered one of the greatest investments because it provides several tax incentives, it can be financed or used to leverage for cash when needed. But that’s not all that it has, let’s look at the other side of it.
The value of real-estate is clearly unpredictable; the property you buy today may be worth 10 times more or completely worthless years from now. There is a tremendous amount of time and energy that you spent on real estate with payment of taxes and utility bills, keeping it in good condition and also selecting new tenants as and when needed.
It allows the investor to gain value through modifications, but such value add-ons do not guarantee you anything in return. The everyday news carries dispute cases that have been under litigation for years for fraud, title, contract breach, etc. It can be used as leverage for cash, but when looking to sell it, it is difficult to find a buyer and the urgency of the situation may lead you to sell at a much lower value.
Still, do you want to put your investment in Real Estate? Let’s look at the current market. The total demand for urban real estate is estimated at 4.2 million units during the period 2016-2020 across the top cities in India. Sounds great right? But know this too, over 4.5 lakh homes remain unsold in the cities of Gurgaon, Noida, Mumbai, Kolkata, Pune, Hyderabad, Bengaluru, and Chennai, despite the huge demand in the market. The homes are either priced higher or are not placed in a good location. Considering all of this, real estate is not the best investment.
But how about Mutual Funds?
This is a vehicle to invest in diversified avenues of investment. It has the added benefit of cover from inflation in the market, and the premise of diversification there is much less to worry about. Mutual Funds has a range of funds that cater to the investor’s return and risk appetite which is professionally maintained by the fund manager. It provides various tax benefits and has high liquidity. Moreover, the number of AMCs has doubled over the past 3 years or so, and according to the Association of Mutual Funds in India (AMFI), over 70,000 new distributors have started to offer mutual funds over the recent years. Now that is a market worth investing in!
If rewards are the cheese and you are the mouse looking for it then Real Estate is the trap that promises you the tasty treat that tricks you to an investment that is ultimately a liability. The pain of dealing with realtors, settling legal disputes, having to put all your money with no immediate benefit is not what you need from an investment.
Don’t invest in better, invest in the best!