When Prabhat, 40, won `35 lakh as a lottery prize, he was on cloud nine. Wanting to make the best use of this windfall for his long-term goals, particularly retirement, Prabhat purchased a two bedroom apartment in one of the poshest areas of the city, based on the age-old assumption that investing in real estate offers bumper returns in the future that can help one reach crucial life goals. Unfortunately, this belief is a mirage.
According to a Knight Frank report, growth in residential prices in the last four years in India’s top eight cities has been below retail inflation. A gap that has increased since H1 2016, the lull in real estate is expected to continue in the coming days too.
According to National Housing Bank data, on one hand, the property prices in Bengaluru and Mumbai increased annually between June 2013 and September 2017 by 5.75 per cent and 7.50 per cent. On the other hand, prices fell by -0.70 per cent annually in Delhi.
Rental income is another wisdom guiding investment in real estate. It is believed that one can rent a house for a secondary income. This again is a fallacy, as rental income depends on numerous factors such as the location of the house and the amenities available within its vicinity.
Also, real estate is a highly non-liquid asset, meaning it can not be converted into cash easily. You need to be extremely fortunate to be able to sell your house within a short-notice, in case any monetary emergency arises.
The legalities involved are another aspect that you have to deal with and all of these can take a considerable amount of time.
Though sales have grown post demonetisation, the number of unsold housing units across India stood at a staggering 4,97,289 at H1 2018.
So, what’s an alternate solution to this? When it comes to securing life goals such as children’s higher education, their wedding, retirement and setting up an emergency corpus, investment is required in an asset that’s liquid, professionally managed and more importantly can beat the effects of inflation. This is where equities hold an edge over other asset classes including real estate.
The table indicates the superiority equity holds over other asset classes when it comes to beating inflation in the long-term (15 years).
With the potential to generate inflation-adjusted returns in the long-run, you can invest in equities directly through stocks or equity funds. If you have the time to track market movements and are aware when to buy and sell, you can venture into equity markets or better, engage with a registered financial planner.
Along with accomplishing other goals, equity investment early in your career can also help you build a corpus for buying a house. Even if you fail to accumulate the exact amount, you can reach close to it or at least garner enough, required for making the down payment and bridging the shortfall with a home loan.
Assuming an annual return of 12 per cent in an equity mutual fund, even a modest SIP of `10,000 per month for 10 years would help you generate a corpus almost over `23 lakh.
While there’s nothing wrong fundamentally in buying a house and investing in real estate, it’s not wise to consider it as a means to reach your life goals. By deft and prudent investments in equities in the long run, you can amass a sizeable corpus to address key goals, including buying your dream home.
The author is the Head, Personal Wealth Advisory, Edelweiss