The Answer is NO. One Can Invest in Mutual Fund through Systemetic Investment Plan (S.I.P.) route.
Well in this article I will like to through some light on facts how real estate market has done broadly viz-a-viz Diversified Equity Mutual Fund over past years in India & why it makes more sense for one who is young or mid aged to Invest in Mutual Fund through Systematic Investment Plan (S.I.P.) route.
In India people easily correlate themselves with Real Estate Returns & the Tangibility it posses.The allure of getting rich through property is so high that people consider it as the only asset class that can Generate High Return/Income for them.
You will find most of the people in their late 20’s & early 30″s rushing to buy a House/Flat/Land/ other property , for which many might take loans & are ready to pay big EMI’s.
Instead it makes more sense to invest in equity mutual funds since you have pretty long saving cycle as you are young & their are plenty of working & earning salary/business income years still left in your kitty till the time you get retire from here on.
I know you aren’t Convinced yet. Have a look:
The EMIs load cut short the regular savings of an Individual:
The Equated Monthly Installment (EMI) on your home loan is not an investment. It is a loan repayment where the lender earns interest off you. Strange Naa…. Since the load of EMIs are high on an individual his personal savings goes down.
For example you have to buy a flat worth Rs.50-lakh and have taken a 15-year home loan at 10.4 per cent. The EMI will amount to Rs.54,960. At the end of 15 years, you would have paid a total of Rs.98.93 lakh to the bank, of which Rs.48.93 lakh will be the interest component alone!
Now to consider this real estate investment as a good investment, it has to generate a return over and above this Rs.98.93 lakh (not the Rs.50 lakh that most individual assume). Instead, one would have invested the same money in good equity or balanced funds – it would have return on your capital, without incurring interest costs.
People say It’s important to have created an asset in form of property till they are earning, if they invest money in equity mutual fund, after fifteen years, they might not left with any asset.
Now I will like to question if this is the first home you want to posses & would you actually live in it ??
As if you are going to live in the same home because it does not earn you any return. There has been no fifteen-year period in Indian stock market history when Mutual Funs SIPs in equity or balanced funds have delivered nothing.
Between June 2001 and August 2016, an SIP investment in HDFC TOP 200 Fund (G) has delivered 21.16% CAGR (compound annual growth rate) return. Again between January 1999 and January 2014, SIPs in Franklin India Bluechip earned over 20.12% per CAGR return.
I believe you aren’t completely convinced yet.
People Say the Value of Their Property has gone up by 14 to 15 times in last 15 years…
It simply means that their CAGR return in Property was 17-18% while if we compute CAGR of HDFC TOP 200 Fund (G) @ 21.16% discussed above the investment would have been gone up by 22-23 times in last 15 years.
National Housing Board Residex (Residence Index) data below shows the top 5 cities out of 26 cities tracked:
Chennai delivered maximum appreciation between 2007 and 2015, with the Residex for the city going up by 3.64 times i.e. close to 17% CAGR Return.
ICICI Prudential Value Discovery Fund (G) with S.I.P. route has delivered a return of over 27.34% CAGR for same peiod.
I do agree Some localities would have delivered Exceptional Returns likewise some stocks & Mutual Funds.
But how to Identify those localities/properties which will boom in advance? This is the disadvantage of investing in real estate.
The same NHB data discuss above also depicts property prices in cities like Hyderabad and Kochi, have actually declined in eight years. It’s far easy to identify a mutual fund based on it’s past track record though the past records are no guarantee of future returns but still it hints you that your money is pooled in with right set of professionals.
If you could diversify your property investments across many markets, your results would have been better. You have the ease of diversification of risk under Mutual Fund making it more suitable investment option.
Also real estate require large sum of money which in turn makes it less diversify unlike mutual fund where you can get diversification benefit from an investment as low as Rs. 500/ Rs.1000.
People say they have seen & met many people who became Crorepati because of Real Estate & have not met more than a handful who become Crorepati by investments in Mutual Fund.
Logic & Answer to this is very simple, since mutual funds provide High liquidity people tend to Buy & Sell at shorter duration rather than holding it for longer tenures like what they do in case of properties.
The above example of return from ICICI Prudential Value Discovery Fund & other funds discussed clearly depicts the long term association benefits of Mutual Funds.
Most people are ready to bear the load of EMIs whether it’s Rs. 20000 per month or Rs. 40000 per month, but when it comes to SIP they think it’s a forceful act by banker/ broker/ financial advisor & shell Rs.2000-5000 only.
Remember, once you sign up for a home loan, you can’t vary/stop your EMI till full payment, if the property doesn’t appreciate or if you quit your job things will not turn rosy.
But with a SIP, you can draw a check in an emergency.