Know why the majority of people prefer real estate over mutual funds?

The majority of Indians still choose real estate investments. However, can real estate outperform diversified equities mutual funds? Let us investigate.

We grew up witnessing our parents and grandparents favour real estate as a kind of savings. People consider it to be a prestigious asset. Many parents prefer to marry their daughters to men who own land, a plot of land, or some other type of residential or commercial property.

Despite this, many individuals despise financial advisors who advise clients to sell their underperforming real estate investments and switch to mutual funds instead. Not only that, but many try to justify their losses when investing in mutual funds and their profits when investing in real estate.

So, why do individuals have such a positive experience investing in real estate yet a negative experience investing in mutual funds? Let us investigate.

In comparison to other asset classes, equity as an asset class has a very great potential to offer you good inflation-adjusted returns. Even if we look at the CAGR (Compounded Annual Growth Rate) supplied by equities mutual funds over a five- or ten-year period, it is unclear how investors could have lost money.

This is because even the poorest diversified equity mutual funds generated returns of 7.83% over five years and 9.15% over ten years, while the top diversified equity mutual funds generated returns of 31.11% over five years and 25.85% over ten years. In five and 10 years, the average returns produced by diversified equity mutual funds are 16.44%and 16.85%, respectively.

For example, if you want to purchase a home worth Rs 1 crore and have roughly Rs 25 lakh in savings, you may get a loan for the remaining Rs 75 lakh by paying a monthly EMI of Rs 58,200 for 30 years. 

Upon deducting principal and interest, the total acquisition price of the property is Rs 2.35 crore. After 30 years, when you have totally paid off your debt, the value of your property would have increased to Rs 10 crore. 

You would be overjoyed since it appears to be a substantial gain. On the other hand, if you invest Rs 10,000 each month through SIP, you would end up investing Rs 36 lakh and will have Rs 3.08 crore at the end of 30 years, even if we assume a CAGR of 12%. 

If your goal is Rs 10 crore, you would need to invest Rs 33.38 lakh in a single payment or Rs 28,500 every month via SIP. Even with SIP, you would invest a total of Rs 1.02 crore, which is 57% less than a real estate investment. 

People believe that Rs 1 crore property turning to be a Rs 10 crore asset in 30 years, is an excellent appreciation. However, its CAGR works out to be 7.98%, and after accounting for your real purchase price of Rs 2.35 crore, the CAGR stands at about 4.95%. 

Moreover, if a mutual fund has a CAGR of 12% over 30 years, it is referred to as a straggler. This is because investors anticipate mutual funds, particularly those that invest in stocks, to provide far larger returns.