Why people prefer to invest in real estate than mutual funds?

We have grown seeing our parents and grandparents preferring real estate as savings. People think that it is a prestigious thing to own. At many places, there is a trend that people prefer marrying their daughters with a man having land or some kind of residential/commercial property in his name.

Having said that, many people hate advisers who suggest to sell off their ineffective investment in real estate and ask them to invest in mutual funds. Not just that but people even try and argue how they have faced losses while investing in mutual funds and how they have benefited from investing in real estate. So, in this article, you will be amazed to know why people prefer investing in real estate and not in mutual funds.

Equity as an asset class has a very good potential to provide you a good inflation-adjusted returns as compared to other asset classes. Even if we look at the five or ten year compounded annual growth rate (CAGR) provided by the equity mutual funds then, it is questionable as to how people would have lost their money in the long-run. Nevertheless, even the worst-diversified equity mutual funds provide 7.83 per cent in five years and 9.15 per cent in ten years while, the best-diversified equity mutual funds provide 31.11 per cent in five years and 25.85 per cent in ten years. Moreover, the average return provided by the diversified equity mutual funds is 16.44 per cent and 16.85 per cent in five years and ten years, respectively.

Example:

Say for instance, you wish to buy a property worth Rs 1 crore and you have around Rs 25 lakh of savings and for the rest Rs 75 lakh, you would take a loan by paying a monthly EMI of Rs 58,200 for 30 years. Considering the repayment of principal and interest, your total purchase value of property comes to Rs 2.35 crore. At the end of 30 years, that is, post you end-up paying off your loan completely, the value of the property increases to Rs 10 crore.

You would be more than happy as it looks out to be a huge gain. On the contrary, if you continue to invest Rs 10,000 per month via SIP, at the end of 30 years, you would end up investing Rs 36 lakh and at the end of 30 years; you would have Rs 3.08 crore even if we assume the CAGR of 12 per cent. If we target Rs 10 crore then, you would need to invest Rs 33.38 lakh lumpsum or Rs 28,500 per month via SIP. Even with SIP, you would be investing a total of Rs 1.02 crore, which is 57 per cent lower than the investment in real estate.

The psychology of people seeing Rs 1 crore property becoming Rs 10 crore in 30 years is outstanding appreciation of the asset. However, the fact is that it has a CAGR of mere 7.98 per cent and after considering your actual purchase value of Rs 2.35 crore, the CAGR comes to around 4.95 per cent. Hence, if a mutual fund generates CAGR of 12 per cent in 30 years then, people term it as straggler. This is because people expect mutual funds, specifically the one that invests in equities, to generate much higher returns.