Real Estate, Gold and Equity, have given whopping profit to their investors over last 20 years. Amongst them equity leaves other two asset classes much behind in terms of returns. Finds, Ritu Kant Ojha KEY TAKEAWAYS Avoid putting in more than 30 per cent of your savings in real estate Limit exposure to Gold to 10-15 per cent Equity must be a part of over all asset allocation for long term goals New equity investors can look at systematic investment plans of good equity diversified mutual funds Equity investing needs patience. Stay invested for long term to reap maximum benefit, Speculating in any asset class can be dangerous...

EVERY financial advisor will tell you that "equity gives the best return in the long term". It is often debated though that as set classes such as Real Estate and Gold may be a better bet. Let us look at the historical prices of each of these three asset classes and compare their returns over the last two decades.

REAL ESTATE The first target set by parents after your first job would have been to buy an apartment or a house for yourself. With rising population, land prices have risen astronomically over the last 20 years in our country. Clubbed with tax benefits on interest and principal repayments, real estate investment is quite attractive. Experts feel that if you are buying a house for living in it yourself, then it probably is not an investment. Mumbai based financial advisor Kartik Jhaveri says that, "if the appreciation on the house you are buying is more than the total EMI you would pay on your home loan, then only it makes sense to buy a house." But the problems start when you start speculating on real estate and risk your hard earned money by investing in it assuming that real estate prices would never drop.

Let us look at the profit you would have made if you invested in real estate in say Bandra West in Mumbai, one of the locations where real estate prices have increased manifold.
If you had bought a property in Bandra in 1991, the price you would have paid for one square feet would have been about Rs 4,000 in 1991, you would have made a profit of 75 per cent by the year 2000. If you had held same property for 20 years and sold it this year, you would have made a whopping profit of 650 per cent. Looking at such returns, anyone would be tempted to put their money in real estate.

GOLD Gone are the days when you bought gold for your wife on her birthday or anniversary. Gold in the last few years has become a `must have' in everyone's portfolio as wealth managers and fund managers advise it as part of an asset allocation strategy.

Gold provides hedge against inflation in your portfolio and experts advise an exposure of about 10 per cent of your savings in Gold. However, with rising gold prices, many investors have overlooked other asset classes and are buying heavily into Gold.

If you would have bought Gold in 1991, and sold it in 2000 you would have gained 37.5 per cent. If you were patient and sold it in 2010 after holding it for about 20 years then your profit would have been a phenomenal 525 per cent.

EQUITY Lets discuss equity now and look at returns of BSE SEN over the last 20 years. If you bought stocks in 1991 then even at SEN returns you would have made 436 per cent if you sold out your stocks in 2000. If you had remained invested for another 10 years and sold your stocks in 2010 then you would have pocketed returns of over 1,871 per cent. However, some individual stocks such as Wipro, Infosys or Reliance Industries have .given even better returns than the SEN as a whole.

ASSET ALLOCATION Given the comparisons, equity seems to leave behind Real Estate and Gold by a huge difference.

But this should not indicate that you should look only at equity for investment. Experts advise choice of an asset class be based on the overall asset allocation strategy. However, every asset class has its own merits and demerits which one must be aware of.

Also, unlike financial investments like fixed deposits, stocks or bonds, you will need to spend some money in maintaining your real estate (e.g., like ongoing repairs, painting, plumbing etc. in an apartment) so that it retains its value." However, investmentdecisionsshouldnotbedependentonthepast performance and it would be prudent to consider all other aspects while choosing an asset class.
Though real estate and gold have in the last few years yielded good returns, they are quite cyclical in nature and over exposure in any of them can be dangerous. Market Strategist, Gul Teckchandani says, "The best part about equity investing is that it is liquid, it can be sold in parts, whenever you want you can sell it, it is much more manageable and historically returns in the longer term would be much higher than in any asset class." Hence, equity must be an important part of your overall asset allocation for all long term financial goals.

Source:Indian Express, 20th Dec, 2010
Ritu Kant Ojha
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  • :)Good article & great food for thought .
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  • Originally Posted by MANOJa
    :)Good article & great food for thought .


    But isnt it undermining two facts -
    1) one has to pay the entire sale price of the property in installments(in case of new launches and underconstruction projects)
    2) RE offers returns on coloured money ( and most appreciation in non taxable because of Taxing norms and again involvement of coloured money , and other tax benefits !!!)

    Just trying for an argument as i am illiterate when it comes to share market and stocks !!
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  • Ishanb, the factors pointed out by u, could vary on individual perceptions & capital in hand .

    This could be one of the reasons of different people going for different kind of money making instruments .

    It is something similar to buying land & maybe paying the entire cost at one go or booking an apartment in CLP, depends on individual capacity, financial power & other perceptions .

    This is my take .
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  • May be this amounts to taking a "panga" with RE investors and posting this on the RE forum.... :bab (22):

    but I just read that these blue chips have given returns much better than what RE investors would hve earned over the last decade....
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  • Thats real good work Vikky

    Nice keep the information coming!!

    Originally Posted by vikky55


    May be this amounts to taking a "panga" with RE investors and posting this on the RE forum.... :bab (22):

    but I just read that these blue chips have given returns much better than what RE investors would hve earned over the last decade....
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  • Interesting

    Amit- Thanks for starting a great thread. This is going to be interesting discussion.

    I believe that the holding period and ability to stay afloat plays a very important role whether it is RE or Equity. If we assume, no liquidity or exit concerns, and long term holding period, equity wins hands down. In addition, equity is 100% liquid and hassle free investment. But when i say equity, i meant index OR MFs because picking the right stocks is not everyone's forte irrespective of time period.
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  • onesachin, very true & a nice comment .
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  • Thanks Manoj.
    Just wanted to add one more thing....historically, in U.S. and I think all over the world, it has been observed that professional money managers have not been able to match the index returns, forget about beating it....goes on to stress my point that equity should be Index or MFs and not stock picking.


    Originally Posted by MANOJa
    onesachin, very true & a nice comment .
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  • Originally Posted by onesachin
    Amit- Thanks for starting a great thread. This is going to be interesting discussion.

    I believe that the holding period and ability to stay afloat plays a very important role whether it is RE or Equity. If we assume, no liquidity or exit concerns, and long term holding period, equity wins hands down. In addition, equity is 100% liquid and hassle free investment. But when i say equity, i meant index OR MFs because picking the right stocks is not everyone's forte irrespective of time period.


    Thanks Amit for the great article.

    what has been the historical returns for index OR MFs ?
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  • I think in 1999-2000 the index was somewhere 3300-3500 and now it is at 20,000....so 6 to 7 times in 10 yrs.

    MFs with .97 to .99 beta with the index should be in the same range.

    Originally Posted by chopra
    Thanks Amit for the great article.

    what has been the historical returns for index OR MFs ?
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  • well i guess this comparison in it self isnt justified , one is picking the best of the stocks that have given maximum returns and is not picking up the real estate data for best returns .

    I guess if one searches for them or from past memory , one can find them !!!

    From what little i know about stock market is - it is difficult to analyse a future of a particular stock 10-20 years down the line , but it is much easier to analyse a property a decade or two down the line !!!

    RE for me personally is a much safer and sure shot bet in the long run when compared to investing in a particular stock !!!
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  • Originally Posted by onesachin
    I think in 1999-2000 the index was somewhere 3300-3500 and now it is at 20,000....so 6 to 7 times in 10 yrs.

    MFs with .97 to .99 beta with the index should be in the same range.


    But you forgot that dropped to 9000 in 2008\09 so anybody needing money would have lost .whether stocks/gold/real estate one should have capacity to hold incase it rains .gold is not for investment for returns it is mainly for safety against recessions one should have 20 % in their portfolio.
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  • Investing in under constructed properties is like F&O trading in Stock markets, one can take a very large position with limited capital e.g by investing 10-20 lakhs people gets an exposure for 1 cr +....

    so one buys at a BSP of 3000 and invest 10 lakh ruppes under CLP, the BSP increases to 4000, one gets 30% returns on the total price and more than 100% return on investment, thats the beauty of investing in an under constructed project.

    Risk on the downside is limited as compared to the fee fall in the F&O investing in stock markets....unless the developer goes bankrupt and whole investment goes down the drain...

    another unique feature is the illiquid nature of the investment people feel that RE never goes down the fact is that they dont come to know the real market value....

    So if I am asking for 100 and a I am not finding a buyer i feel that market has stagnated the fact is that there may not be a buyer even at 90 but we never come to know this.......

    The above game is the reason why the under constructed property sees more rise than constructed property....the basis is speculation to a major extent and little like fundamental factors like rising middle class, increased purchasing power and GDP and so on.....

    When this kind of market gets over leveraged where people buy 3 flats when they can afford not even one..the market is highly speculative and can definitely see a major correction unlike what many RE pundits feel that RE never goes does which is incorrect
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  • Nice comment, amit . Fits the current situation pretty well
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  • Originally Posted by amit001

    The above game is the reason why the under constructed property sees more rise than constructed property....the basis is speculation to a major extent and little like fundamental factors like rising middle class, increased purchasing power and GDP and so on.....


    I have been trying to figure out who can actually afford to buy these 1 CR + 3 BHKs for end use - coz honestly, 1 CR for a 3BHK is not cheap in todays terms too. Middle class has definitely grown but for the end users (I believe mostly salaried class), its still not easy to afford a 1CR apartment unless its a DINK household with decent individual salaries.

    A 1CR apartment with say 20% down payment & rest in loan (typical of salaried class - like myself & my friends) will still command an EMI of 88000 INR PM. A sensible calculation requires home loan EMI to be not more than 35% of your take home which brings your monthly take home to be approx 2.5L. For a high risk individual, lets say take home might be 2L bringing the annual take home to be about 24L. Include the tax percentage of 20% (Not sure if Im even in the ballpark) - and it makes the annual salary as 30L.

    It's still manageable for DINK - about 15L salary per person is, I believe, average in Delhi nowadays. But for a household with single earning member - 30L is still considered pretty high salary.

    Or maybe I'm completely out of touch with reality and 30L is average salary in NCR nowadays.
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