Get rich without Real estate, get rich with SIP's

There’s a misconception among Indians that real estate is the only investment that can make us rich. Due to this, young generation in their 20's and 30's opt for a handsome home loan and sign up for an apartment. But, if you are in your wealth creation phase, it makes more sense to invest aggressively in equity or balance fund via SIP.

Misunderstandings about real estate

1.   Myth, Home is an asset

Asset is one from which we earn returns; we do not consider self-occupied property as an investment asset.

·      EMI's on home loans are compulsory savings – Suppose, we have a 50lakh loan for 10yrs at 10.5%pa - EMI is Rs.67000. After 10yrs total amount comes to 81lakh that we pay to the bank. We end up paying 31lakh as interest. So appreciation should be counted on 81lakh and not on 50lakh. The same amount, if invested in equity / balance fund will earn you around 1.84crore.

·      If we postpone our desire to own a house for 10yrs instead and stay in a rental of 50lakh for 10yrs, rent amounts to around Rs.12, 500 per month. Thus we are paying 15lakh rent in 10 years. And if the balance amount of EMI (67000 – 12500) is invested in equity / balance fund, we create a corpus of 1.5crore in 10yrs.

2.   Myth, Real estate always multiples in value

·      If we consider the period from 1992 to 2002, there were no transactions at all in the market. Anyone in need of money at that time sold property in distress and they didn’t even beat bank FD. Andheri (West) rate around Rs.3000 per sq. ft in 1992 amounted to Rs.3500 per sq.ft in 2002.  It's just 1.20% in 10 yrs.

·      There has never been a ten year cycle in Indian stock market history where SIP’s in equity or balance funds delivered nothing. Between June 1992 and June 2002, which is worst 10 yrs for Indian markets, a sip in UTI Master share delivered 13% CAGR.

·      Again in flatish period of 1994 to 2004, a sip in many funds, like Franklin India blue-chip earned over 20% CAGR.

Doubts in the mind of investors

1.  Property prices rose by five to six times in last 7 years of 2008 to 2015

·      But if we translate this into CAGR, you will find that returns are much higher in good equity sip funds. As per National housing data, Chennai delivered the highest. Property bought for 40lac in 2001 is worth  2.04crore in 2015.

• But it’s CAGR is 13.6% per annum,  data from NHB from 2007- 2014

Chennai CAGR - 19.8% (3.5 times)	Pune CAGR - 14% (2.4times)
Mumbai - 13.9% (2.3 times)	Bhopal -   14 % (2.29 times)
Ahemadabad- 13.3 % (2.13 times)	And other top cities rose between 11.4% to 3.3%

·      Comparing it with SIP of middle performing funds would have earned 17% CAGR and top performers would have earned you 20%, plus tax free returns.

2.  In all India data some localities would have delivered bumper returns

·      But is it possible to identify those localities in advance?

·      This is the disadvantage of investing in real estate. For having sufficient gains; you have to know not just right state, right city, but also localities within it. The same NHB data for instance, shows that property prices in Hyderabad and Kochi have declined in last 7 yrs.

·      Selecting right MF to invest is difficult too, but you can invest based on the funds track record of 3 yrs, 5 yrs and 10 yrs. Even prices we are paying to purchase is right and transparent.

·      If we could diversify our property investments across many markets instruments, our returns would be better off. And owning large amount, most people end up taking one piece of property. That is called concentration risk.

1.   Lastly, though property has enough potential, why people become millionaires via SIP?

·      Reason is NAV of MF is available daily and there’s no lock in period.  So people are tempted to time the market. If you do the same in property, you loose your money.

·      Amount invested via SIP is in small denominations of Rs.3000 to Rs.5000 and people end up paying EMI of Rs.30000 to Rs.70000.

Remember, once you sign up for a home loan, and if the property price doesn't appreciate or if you quit/lose your job

·      You can't vary your loan amount.

·      You can't vary your EMI.

·      You can’t stop paying it.

With SIP

·      you can stop or recheck anytime.

Herewith, we are only recommending you to not waste your wealth creation phase and take a prudent decisions for your investments.

	Thumb rule in Financial Planning says that out of Rs.100 earned 1.                         Save minimum Rs.30 into wealth creation assets. 2.                         Your EMI should be maximum Rs.30. 3.                         Remaining Rs.40 is your home expenses.