Is owning property an ultimate mark of success and a symbol of steady wealth? Asks Radhika Gupta, managing director and CEO of Edelweiss Mutual Fund, “Once upon a time in Delhi NCR where I come from, the measure of wealth was the number of properties you had.”
“Showing off meant talking about one plot here, one flat there, and another office space close by,” she wrote in a post on social media platform X (formerly Twitter).
Real estate, in India, has generationally been viewed as a solid asset among investors. Take Akash Kaushik’s story for example who had always believed that owning property was the ultimate mark of success.
Kaushik, 27, born and raised in a middle-class family in Delhi NCR, grew up watching his father talk about amassing enough money or loaning to buy a property. For years, conversations around the dinner table revolved around property rates, good deals, and the “golden opportunity” to invest in land in a nearby developing area.
Akash recalls a story his father told, “I once bought Tata Shares, but sold it off in a week,” - because he neither understood the relevance nor logic behind investing in the same. Many years later, his father bought an 18,000 square feet plot in Noida extension in 2003 for about Rs 1.5-2 lakh. That land, which now houses their entire family, currently has a value above 1.2 crore. Like many in his generation, Akash was taught that real estate was the surest way to secure financial stability and social prestige.
But things are changing. Though Akash still believes that owning a property will secure his wealth, however, accumulating enough capital to acquire the same is the challenge. “For someone like me, I think starting with SIPs is the safest option to generate wealth in the long term,” he says.
Gupta in her post emphasised this point. “With India financialising, the new measure should be the size of your monthly SIP book. I would love to hear young people say, "Meri toh mahine ki 1L ki SIP hai, (I have an SIP of about Rs 1 Lakh per month) what about you?” she writes.
The Difference: Property v/s SIPs
One should know that the nature of investment in a property and SIP is completely different.
Property has long been considered a safe, long-term investment. For Akash’s father, buying a plot meant having something tangible, a legacy to pass down to his children. However, the real estate market is also volatile: prone to its own limitations and benefits.
Let’s understand how property and SIP investment are different, and how(if) they compare:
1. What is the nature of investment?
Property: Real estate is a physical asset, and its value increases or decreases with inflation over the long term. However, it is illiquid, meaning you can’t easily convert it into cash without putting in significant time, effort, and transaction costs.
SIPs: Systematic Investment Plan is a mode of investing in mutual funds where a fixed amount is invested regularly (monthly or quarterly) into equity or debt markets. SIPs are much more liquid than property investments and can be sold anytime without heavy or time-consuming procedural troubles.
2. How initial capital requirement is different?
Property: Real estate requires a significant upfront investment, often necessitating a loan. Case in point, Akash is unable to buy a property of his own because he doesn’t have enough capital in hand to buy one in cities like Delhi NCR where prices have skyrocketed compared to what it was just a decade before.
SIPs: SIPs, on the other hand, allow investors to start small with as low as Rs 500 or Rs 1,000 a month. They are accessible to a larger section of the population, especially for those who want to grow wealth in the long term without incurring debt. Here, the power compounding helps appreciate your investments even if the amount at hand is less.
3. What are the risks?
Property: Real estate is often considered a safe investment option securing and locking your wealth for the long term. However, its returns can be unpredictable and depend heavily on three factors - the location of your property, regulatory guidelines in place, and macroeconomic conditions of your city/country. Additionally, real estate cycles can also result in stagnant, declining prices or can double over in the years to come.
SIPs: In systematic plans, fund managers invest your SIP money in the stock or bond markets which are inherently volatile. However, over the long term, equity mutual funds via SIPs have historically outperformed many asset classes, including real estate, with average returns ranging between 10-12 per cent.
4. What are the maintenance and tax management differences?
Property: Real estate comes with a set of associated costs other than buying. These include property maintenance, taxes, legal fees, and oftentimes loan repayments. The gains acquired from real estate are also taxed under capital gains which can eat into your profits.
In the Budget 2024-25, the government of India removed the indexation benefit that home buyers used to enjoy earlier. Finance Minister Nirmala Sitharaman has reduced the LTCG tax by 12.5 per cent from 20 per cent, while removing the benefit of indexation benefit. This was seen as a big blow for homeowners as the indexation allows taxpayers to adjust the original purchase cost for inflation before calculating the capital gains, lowering the overall tax outgo.
However, the government has further revised this rule now wherein individuals or Hindu United Families (HuF) who bought houses before July 23, 2024, can compute their taxes under the new scheme i.e. 12.5 per cent (without indexation) and the old scheme at 20 per cent (with indexation) and pay the tax that is lower of the two.
SIPs: There are no maintenance costs involved in SIPs. Taxation on mutual funds is transparent and based on the nature of the fund. For the calculation of tax, each instalment of SIP made in a mutual fund scheme is treated as a separate entry/investment. All mutual fund investments follow a (FIFO) First-in-first-out policy wherein it is assumed that the units that are sold were purchased first.
How Should You Set Your SIP Targets?
1. Identity Your Goals: If you are inclined towards investing in SIPs, it is important to align the investments you plan to make in accordance with your financial goals. Here is what you should keep in mind:
A) Short-Term Goals (3-5 years): You can start an SIP for as short as a three to five-year target for goals like buying a car, taking a vacation or creating an emergency fund. For short-term goals, you can invest in low-risk, debt-oriented mutual funds through SIPs.
B) Mid-Term Goals (5-10 years): Marriage, buying a house, funding children’s education, etc. can be included in your midterm goals. Perhaps for this, a balanced mix of equity and debt funds might be ideal.
C) Long-Term Goals (More than 10 years): Retirement or long-term wealth creation can be your SIP target for over 10 years. For long-term goals, equity SIPs are often a good bet, as they offer the potential for high returns, especially when held over long periods.
2. Realise Your Target Corpus: By using an SIP calculator you can figure out how much investment you need to make in order realise your corpus target. For example, if you want to generate around Rs 50 Lakh over 10 years, you will have to invest around Rs 21,000 per month. This will generate a return of Rs 24,71,460 with an investment of Rs 26,40,000 giving around Rs 51 Lakh.
(Grow SIP Calculator used to generate estimated returns figure.)
3. Diversification and Consistency: Diversifying your SIP base is good but investors should know that consistency is the key. In an interaction with Outlook Money, Manasvi Garg, Sebi RIA, CFA, Founder and Chief Wealth Manager, Moneyvesta stated that an investor should not target more than 5-6 SIPs for diversification purposes. Since over-diversification can dilute your overall results.
SIPs v/s Property: Which is the right measure of wealth?
The decision to invest in property or an SIPs must be taken separately without comparison. This debate boils down to what your financial goals are and the kind of risk you are comfortable taking. Where property investment requires huge upfront capital and offers long-term security - they are not easy to liquidate at the time of need. SIPs, on the other hand, allow for regular small investments with the potential of higher long-term returns offering a more flexible approach to wealth creation.
