Why Mutual Funds May Trump Real Estate as An Investment Option?

We Indians are believers in creating assets and leaving it behind for the next generations. Saving up and funding assets is a must, for most Indian families. So, what kind of assets do we look at investing in? In a typical Indian family, it will mostly be gold, real estate (either a plot or a house), and in a rapidly growing crop of people, mutual funds and SIPs as well. So, what prompts our choices and how do we make our asset allocation decisions?

We recently shared our views on the pros and cons of gold as an investment option. So, left with the possibilities of real estate and mutual funds, let’s look at which one to choose and what are the pros and cons.

Initial investment

Many people usually save up for years to purchase a real estate asset as it is never cheap. The initial investment in real estate is always high, and at most times, apart from their entire savings, most buyers also end up taking huge loans. These loans can become a liability in the long run, if not planned for properly. Also, life is full of uncertainties – ill health, loss of job for an earning member, new family commitments, etc. can change the equation overnight.

In contrast, investment in mutual funds can start with as little as even INR 500 or 1000. You could choose to begin a Systematic Investment Plan(SIP) with a small amount per month and slowly build it up into a growing investment. In fact, many people have invested in mutual funds quite early on, from the time they have started earning and made enough profits, to invest in real estate. So, while you may not be able to purchase real estate unless you have lots of money to spare, mutual fund investments can start at an early age, and you need not wait to accumulate your savings.

The Process

Investing in real estate is not an easy process; one has to find the right property, at the right price, at the right time, at the right place. At times, you may have to involve brokers or other such third parties and pay out commissions as well. The property papers must be legally verified, and the due process of registration needs to be completed, which is again a bit cumbersome. In short, it is tedious, fraught with painful procedures.

For investing in mutual funds, however, there are no such hassles. Once you decide the amount you wish to invest, you can quickly start an investment account with your bank and transact online. Your relationship manager at the bank or a trusted financial advisor will help you maximise your returns by growing your money while reducing the risks as much as possible.

The Liquidity Factor

Any investment is made with the intention of growing one’s money and also providing a safety net in tough times. Real estate prices do rise slowly and even accounting for market slumps typically your property value would have gone up. The pain point is liquidity.  If you need money immediately to fund an emergency or new goal, selling your property for the right price promptly is difficult. Here again, the process is long- you need to find genuine buyers, and it takes time for the money to come in hand. In contrast, selling mutual funds is more comfortable, and at most times, the money is back in your account within three working days’ time.

While we all seek the safety and security of owning the roof over our head, do consider first building a growing mutual fund portfolio and then using the earnings to build a dream home.

NBFC leadership & our position in it…..

running-horse-black-white-2

Banking sector went into a turmoil following NPA’s and bad asset management. Public Sector Banks went out of investor favor. The Private Banks which always commanded rich premium among investors too began to lose attraction because of more and more regulations tightening their hands on growth. While all this was happening and keeping the financial sector at the razors edge, NBFC’s went to become leaders in the financial sector with phenomenal growth in their valuations.

The reasons behind NBFC’a gaining strength were –

  1. They are healthy on NPA’s.
  2. March quarter profit growth was 32%, while private banks had 23%.
  3. Home loan portfolio increased by 12%, all of it grabbed from the private banks.
  4. Focused approach made them best placed to grab opportunities arising from the base of the pyramid.
  5. Bountiful monsoon that is expected this year is likely to boost rural income, where NBFC’s are well placed.
  6. Most of them are positioned in the lower income segment, where the budget provision of more deduction on interest payment for the first time home buyers for loans upto 35 lakhs, came to their advantage.

Investors moved away from richly valued private banks to NBFC’s which shows in their stock growth in the last 1 year. NBFC’s had registered between 20 – 60% growth in the last 12 months. Toppers among them are Chola Finance, GIC Housing, Repco Home, Shriram Transport, Canfin Homes, Bajaj Finance etc.,

In our portfolio, 22% percent of the total equity exposure is in the financial sector and we do not have any banks in our portfolio. We hold all the top names along with stocks like SKS Micro, Edelweiss, which have shown good growth in their top line and bottom line. Our entry into these stocks was fairly early, giving us the edge to capitalize on their growth. Most of our investments have given above 15% growth since we have invested.

As an automatic process, our research identified the stocks in this sector for our investments.

Gift yourself a second home

Housing loans are like children begot with pleasure, but bought forth in pain. Buying a house is a joy, but, the time it really takes to own it, is a pain. Until the last EMI is paid, it is a loan house, not your own house. You can pay back your 20 year loan in 11 years. Paying off early gives an option to own a second home, which will support you with a rental income on your retirement.

By adding 20% of the EMI amount and saving the same as SIP’s in Equity based mutual funds will ensure that you have a corpus equal to the loan balance at the 11th year. Pay off your loan from this corpus and make your loan house your own house.

How this works?

If you have a housing loan of 25 Lakhs & your loan EMI is Rs. 25000 per month. Along with paying the EMI, add 20%, that is Rs. 5000 and save it though SIP’s in Equity Mutual funds. On the 134th month, that is., 11 years and 2 months into the tenure the loan balance will be Rs. 17.19 lakhs. On the same date your Mutual Fund SIP value will be Rs. 17.14 Lakhs. Redeem the investment and clear the loan.

What is the rate of return on your investment?

It has been calculated at 15.00% per annum. Following table will be a proof for the same.

CAGR Img

The compounded average growth rate for the SENSEX from the period of its inception (Mar-1979) till Dec- 2013 is 16.65%. Average returns will overtake the probability of loss on any investment that exceeds 7 years tenure. The probability of loss becomes zero from 10th year onward, while the returns show a constant increase.

In this 35 year period we have had 2 international wars (Iraq & Afganistan), 2 of our prime ministers assassinated (Indira & Rajiv Gandhi), 5 Stock Market Scams, 1 historic International terrorist attack (9/11) & an historic recession in 2008. In spite of all these disturbances and uncertainties, our economy has had the above growth.

If a plain vanilla investment into SENSEX can have a zero risk and 10.14% return on investment for a 10 year period, a little extra effort in identifying the Mutual Funds that have their investments in the best companies along with the Rupee Cost Averaging due to SIP’s will ensure 50% extra returns, which is above 15%.

The average returns of a Rs. 10000 SIP into one of the best known Mutual Fund Scheme (HDFC Top 200) from May 2004 to 2014 is as follows

HDFC Top 200 Fund (G)
Investment Period Jun 10, 2004 to May 10, 2014
No of Investments

120

Total Amount Invested (Rs)

1,200,000.00

Total Units Purchased

10,541.31

Investment Value as on May 10, 2014

2,870,989.30

Latest NAV 296.00800 (as on May 22, 2014)
SIP CAGR

16.87%

Bravisa Templetree’s research facility helps us in identifying the best performing Mutual Funds which assures returns that are far above the SENSEX average. We help channel your investments into the best performing funds. Hence, you not only pay your home loans early, you also have the opportunity to have a second home without much effort and have a regular rental income throughout your retirement years.

 

Similar kind of investments can be structured for life time goals like Retirement, Children’s education, wedding etc., By planning and beginning early you have all the possibility to live your life King Size.