Investing is a journey, full of twists and turns, highs and lows. But the right choices can make all the difference. Investing is a crucial aspect of financial planning, and it is essential to understand the different asset classes available. Two popular investment options in India are real estate and equity investments.
Two friends, Prem and Yanshu, were sipping tea at local tea shop after a long day. Their conversation naturally drifts towards the topic of investment. Their perspectives diverge as they engage in a lively debate about Real Estate Investment versus Equity Investment. Let’s join them as they discuss the merits and drawbacks of these two popular investment options.
Prem: “You know, I’ve been thinking where to invest my hard-earned money. Where should I invest? What are your thoughts on real estate investment, Yanshu?”
Yanshu: “Well, Prem, real estate does have its own advantages, but according to me equity investment will be a better option as it holds the keys to sustained growth and financial prosperity.”
Prem: “Isn’t real estate considered one of the safest bets, though? Investing in tangible assets like land and property feels secure, doesn’t it?”
Yanshu: “You’re right, but let’s delve deeper into the facts and figures, Prem bhai. Equity investment possesses its own set of advantages that might just overshadow real estate.”
Ease of Investing:
Yanshu: “Speaking of advantages, consider the ease of investing, Prem bhai. With equity investments, you can start with as little as a few thousand rupees through Mutual Funds or Exchange-Traded Funds (ETFs). It’s as simple as opening a brokerage account, and you can start building your portfolio online. Real estate, on the other hand, requires substantial capital upfront, making it less accessible for many.”
Historical Performance:
Yanshu: “Prem bhai, historically, equities have outshone real estate when it comes to returns. Over the past decade, equities have delivered an average annual return of approximately 11-14%, while real estate has clocked in at around 5-8%.” To illustrate, if you had invested 10 lakhs INR in equities a decade ago, its current value would likely hover ~ 34 lakhs INR. In contrast, the same Rs 10 lakhs invested in real estate 10 years ago may have grown to just Rs 20 lakhs today, highlighting a massive 65% difference compared to the Rs 40 lakhs from equities. This glaring gap showcases equity’s superior ability to generate inflation-beating returns over the long run.
Prem: “The numbers look fascinating, the growth of equity in the last decade is remarkable, but what about the risks that come with the stock market. In this matter, the real estate seems more stable and secure.
Liquidity and Diversification:
Yanshu: “Valid point, Prem bhai, but liquidity is a pivotal asset of equity investment. Unlike real estate, where selling a property can be a prolonged and lengthy process, equities can be swiftly bought and sold in the stock market. Furthermore, equity investments open doors to diversify your portfolio across various sectors and companies, effectively reducing risk.”
Returns and Passive Income:
Prem: “Hmm, I see your perspective. Nonetheless, real estate generates rental income, providing a steady cash flow.”
Yanshu: “Certainly, Prem bhai, but the rental yield on real estate investments typically hovers around 1-2% annually, whereas stocks also have average dividend yield of ~2%, but few stocks do have dividend yield which is more than the average. Moreover, equity investments have the potential for faster capital appreciation, thereby accumulating wealth over time.”
Economic Factors and Market Dynamics:
Prem: “Well, what about economic factors? How do they influence both investment types?”
Yanshu: “Economic conditions do have an impact on both real estate and equity investments. However, equity markets tend to respond more swiftly and reflect changes quicker. Additionally, the Indian market has exhibited resilience, attracting substantial foreign investments and benefiting from the relocation of the manufacturing sector from China to India.”
Prem: “Fascinating. But what about stock valuations? Aren’t they currently inflated?”
Yanshu: “Not necessarily, Prem bhai. The Nifty’s price-to-earnings (P/E) ratio presently sits at a reasonable level, signifying that the market is not overvalued. Furthermore, the anticipated growth in Nifty’s earnings per share (EPS) suggests potential for further gains.”
Retail Interest and Confidence:
Prem: “I’ve been hearing a lot about people investing in real estate. Doesn’t that indicate a positive trend?”
Yanshu: “While there is a moderate level of retail interest in real estate, equity investments have gained traction among retail investors due to heightened awareness, easy access to information, and user-friendly online trading platforms. This growing confidence in the equity market underscores its substantial potential.”
Risks – Equity vs Real Estate
Yanshu: “Also, Prem bhai, let’s talk about risk. When you invest in equities, you spread your risk across a diversified portfolio of stocks. The chances of a significant loss due to a single stock plummeting are lower. In contrast, most people can only afford to buy a single house or property, which is a concentrated investment. If the local real estate market takes a hit, it could result in a substantial loss. Equity investments, especially through diversified funds, offer more risk mitigation.” Traditionally realty was considered a safe investment due to frauds and manipulation in the stock market. But in recent times, such scams and market manipulation have been reduced a lot because of strict rules and regulations of SEBI which does a good job of ensuring that investor money is safe. Also, Real estate has hidden local risks such as civic work risk, such as multiple utilities digging in front of our property and obstructing access. Other risks include fraud risk while buying, a goon illegally squatting on your property, etc.
Prem: You are right Yanshu, that is the benefit of diversified portfolios in equity investment which isn’t possible for most while investing in real estate. REITs as an investing vehicle haven’t really taken off in India. Also the point of hidden risks in real estate in India is fair, I had not thought about them earlier.
The PMS Solution:
Prem: “I do have a substantial sum to invest, Yanshu, but I can’t commit to monitoring the markets daily. Real estate seems hassle-free in that regard.”
Yanshu: “You’re absolutely right, Prem bhai, but if you possess significant capital and wish to invest without the stress of daily market watching, there are options available. Consider Portfolio Management Services (PMS), where you will get a SEBI-registered, seasoned fund manager to oversee your portfolio, making informed decisions based on market conditions. This approach can potentially yield high returns with minimal risk, as you’ll have a professional fund manager handling your investments. It’s a good way to invest in the equity market, aiming for superior returns, without the need for daily monitoring.”
As Prem and Yanshu conclude their tea break, Prem nodded, realising the benefits of equity investments. “You’ve given me a lot to think about, Yanshu. I’ll definitely consider investing in equities alongside real estate.” Yanshu smiled, “That’s the spirit, Prem bhai! It’s crucial to make informed investment decisions based on your goals, risk tolerance, and financial situation. Equity investments offer flexibility, diversification, professional management, and transparency that can make them a wise choice. Just remember to stay updated with the latest market trends and consult a financial advisor if needed.”
Hence, the choice between the two hinges on individual preferences, risk tolerance, and investment objectives. By the way, one should consult a financial advisor, conduct meticulous research, and weigh the pros and cons before venturing into the world of investment. Happy investing!