Why Investors Prefer Real Estate Over MFs

Mutual funds have the potential to give better risk-adjusted returns than real estate. DSIJ explains how the different approaches towards real estate and mutual fund investments deliver different investment experience.



We have grown seeing our parents and our grandparents buying property from their savings as buying real estate was considered as a prestigious thing. At many places, there is a trend among parents who prefer marrying their daughter with a guy having land or plot or some kind of residential or commercial property in his name. This makes real estate an asset class that is considered as a status symbol by many people. Real estate is one of the most preferred asset classes which people wish to own and invest money. 

Many people hate advisors who suggest selling off their ineffective investment in real estate and investing in mutual funds. They are attuned to investing in property instead of mutual funds. They argue about how they incurred losses when they had invested in mutual funds and how they had gained with their investment in real estate. So why do people have such a wonderful experience of investing in real estate and not-sogood experience with investment in mutual funds? Let’s find out. 

This kind of approach towards mutual funds makes them buy mutual funds when the markets are high and exit them when the markets are low. But this is quite the opposite when it comes to real estate.

Equity as an asset class has a very good potential to provide you good inflation-adjusted returns as compared to other asset classes. Even if we look at the five-year or ten-year CAGR (Compounded Annual Growth Rate) provided by the equity mutual funds, then it would be a mystery how people could have lost their money. This is because even the worst performing diversified equity mutual funds has provided return of 7.83 per cent in five years and 9.15 per cent in ten years and the best diversified equity mutual funds provided 31.11 per cent in five years and 25.85 per cent in ten years. The average returns provided by the diversified equity mutual funds is 16.44 per cent and 16.85 per cent in five years and ten years, respectively. 

In reality, people do not follow the practice of staying invested in mutual funds for a long period of time and they just try to time the market to earn more in a short span of time. This leads them to continuously churn their mutual fund portfolio. This is a very ineffective way of approaching investment in mutual funds. Due to this, the experience of investors investing in mutual funds is not good. 

This kind of approach towards mutual funds makes them buy mutual funds when the markets are high and exit them when the markets are low. But this is quite the opposite when it comes to real estate. While investing in real estate, people generally don’t look to time the market or frequently churn their real estate portfolio. If people have the same approach towards real estate as they have towards mutual funds, then surely there is a high probability that they would incur losses. But people don’t time the purchase of real estate as they purchase it when they are in need and not when the property prices are rising. Even if the property prices are going down, people wait for the prices to rise again rather than selling off the property. 

The reason for the difference in buying and selling behaviour between mutual funds and real estate is that in the case of mutual funds, people can track their investment on a daily basis as the NAVs (Net Asset Values) are updated on a daily basis, but this is not so in the case of real estate. Due to this, it becomes very difficult to control the emotions and even a small fall in the.NAV makes people anxious. On the contrary, in the case of real estate, you will not be able to know the price unless you wish to buy or sell. So, this makes people hold the property with conviction, even though the prices may be going downwards. Moreover, you can transact in mutual funds with ease, which is not the case with real estate, and hence, people remain invested in real estate, but buy or sell their mutual fund investments frequently. 

Another major reason we do not see many people earning more out of mutual funds as they do with real estate is the amount they invest in mutual funds and real estate. 

If we look at the people investing in mutual funds, in majority of the cases, we find that many people just start an SIP (Systematic Investment Plan) with a sum of Rs 1,000 or Rs 5,000 or a maximum of Rs 10,000 per month. But if we look at the EMI (Equated Monthly Instalments) that people pay towards owning a real estate, they are ready to commit Rs 30,000 to around Rs 80,000 per month, which may be a large chunk of their monthly income. How is it possible for the SIP of Rs 10,000 to earn what you are earning out of EMI of Rs 80,000? The less you invest, the less you get back. The conviction of people to buy real estate is so powerful that they are ready to leverage their savings to make a bigger bet. 

Example: 

Let’s say, for instance, if you wish to buy a property worth Rs 1 crore and you have around Rs 25 lakh of savings and for the balance amount of Rs 75 lakh, you would be taking a loan with a monthly EMI of Rs 58,200 for 30 years. Considering the repayment of principal and interest, your total purchase value of property comes to Rs 2.35 crore. At the end of 30 years, that is, after you finish paying off your loan completely, the property value increases to, say, Rs 10 crore. You would be more than happy as it makes a huge difference. However, if we assume that you take a loan to buy equity mutual funds (Thogh it is not a good idea to do so) and continue to invest Rs 10,000 per month via SIP, at the end of 30 years you would end up investing Rs 36 lakh. At the end of 30 years, you would have a corpus of Rs 3.08 crore even if we assume a CAGR of 12 per cent. 

In the above example, the amount invested in equity mutual fund is 6.5 times less than that invested in real estate. The psychology of people is that they like Rs 1 crore worth of property becoming worth Rs 10 crore in 30 years as they think it is an outstanding appreciation of the asset. But the fact is that it has a CAGR of mere 7.98 per cent, and after considering your actual purchase value of Rs 2.35 crore, the CAGR comes to around 4.95 per cent. So, if a mutual fund generates a return of 12 per cent in 30 years, people still term it as straggler as people expect mutual funds, specifically the one which invests in equities, to generate much higher returns.

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