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Should you invest in equity or buy real estate

It is less cumbersome to buy equity given the handholding offered by mutual funds.

Anil Rego

The debate on whether equity investments are better or worse than real estate investments has been going for the longest time. Since, both have their positives and negatives, let us look at both options in a little more detail.

Equity:

There are several benefits to owning financial assets over real estate assets, such as lack of safety concerns since all the assets are in electronic form. They have the benefit of diversifying into various sectors, better liquidity, and if held for over a year, the capital gains from equity are tax free.

You have the option of either directly investing in equity or via mutual funds. If investing directly, then you will need to do your research and based on this, you can buy or sell stocks.

The other option is to invest via a mutual fund. Equity mutual funds offer the advantage of not requiring to monitor the markets on a daily basis, and ensuring that one need not be a seasoned investor to take advantage of the returns provided in the equity markets. These funds come in a variety of ways, such as index funds (which track the return on the index and are one of the best investment options for the long term), diversified funds, sectoral funds, etc. Each of the funds cater to a different type of investor, and once you decide on your risk profile and financial goals, you can select the appropriate mutual fund to invest into. It is advisable to invest in a mutual fund via a SIP (Systematic Investment Plan), to avoid timing the market, since at times of rising markets one gets better prices and in falling markets one gets more units. Mutual funds also allow to start small which is not the case with real estate.

These are ideal long term investment options, especially since they have no capital gains tax if held for over a year.

Property:

In real estate, there is a scope for capital appreciation, as typically the longer one holds on to properties, higher the capital appreciation. There is also the benefit of rental income and the fact that real estate gives the investor some sense of security.

Firstly decide whether you are a speculator or an investor. A speculator buys into the market with a view to selling in the short term as the market rises, whereas an investor holds the land for the long term & may or may not sell the property for a very long time

However, there are several disadvantages to real estate such as the legal issues, which can be complex and an investment in land, must be considered only if an investor has a thorough understanding of these. Sometimes the land may be mandatorily acquired by the government for state development which sometimes even leads to a loss, as the compensations are low. Also, this asset is illiquid and cannot be sold as quickly as stocks or bonds. Another fact to keep in mind is the high maintenance cost, especially in urban house property owners are required to pay maintenance charges to co-operative housing societies for common facilities – like lifts, security, water, common lighting, etc.

Many people get into property investment hoping to become overnight millionaires. They think property will be a quick fix to their financial problems, but the truth is seeking short term gains in real estate is more about speculation than strategic investing. It’s not all that easy to buy and sell property, and doing so will rarely make you rich. It takes time to sell real estate and then there are the numerous costs involved, including capital gains tax.

Real estate is a good asset class to invest in, provided you have the ability and the time to do your research and take adequate measures to ensure safety of the asset.

At the end of the day, there needs to be a judicious mix between real estate and equities. One can buy a property to live in and maybe one to rent, and post that invest via REIT’s. However, the physical assets are the core of a properly diversified portfolio.

Summary:

•Equities have the benefit of investing via mutual funds and also no capital gains if held for over a year
•Real estate needs a lot of research before investing
•Decide on the the type of property as well - commercial or residential
•Investment in both asset classes will make a good portfolio
First Published on Jan 20, 2016 04:57 pm
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