Have you ever wondered how equity investment fares against real estate investment? Yes, we have seen the bullish market in stock market where market saw irrational valuation of stocks and IPOs which were unheard before the boom. Similarly, we have seen extreme valuation of real estate properties where an apartment measuring 2000 sq. ft. was sold at crores in Mumbai.
We have also seen how blue chip stocks have slumped to very low level despite the businesses behind them doing well. We have also experienced how realty prices crashed in cities owing to political instability and market crisis.
Which one is better to invest?
There is no straightforward answer to it. We have examples of companies like ICICI bank that rose from 300+ in March 2009 to 1000+ in one year. We also have example of Samshabad (in Hyderabad) where realty prices went up multiple times in a span of few months as a result of announcement of slew of measures by the AP Government. However, what we can do is to discuss some of the points which can help us have better insight into what these investments are and what we can expect. Let’s discuss these investments on the basis of three major points.
Ease of trading
Without doubt, stock market investing offers an ease which is unparalleled. You can invest in stock market with amount as little as Rs 500. It can be done in the comfort of your home. The case with real estate is different. You have to go and survey the property, inquire about the locality, and go through a whole process including Government regulation to invest in it.
The similar difference is in selling. Selling of stocks is very easy while selling real estate includes a plethora of regulations, taxes, and laws.
Risk reward structure
Risk reward structure explains the rewards expected and achieved in lieu of the risk taken by the trader. There is no clear winner in this. The risk of losing money is there in the market as well as real estate. The reward is also very satisfying ion both form of assets.
What differentiates real estate, however, is its utility even when the prices slump to a very low level. Investors can still use their property to live, rent, or earn residual income. The same cannot be said of stocks. Unless the business behind the stock rebounds, it will end up in loss for investors.
The only difference is the kind of financial leverage (buying on loan) that real estate provides is unique in all asset class. A shrewd investor can use the leverage very effectively to make good money for him or her. However, despite the leverage, real estate cannot be termed as better investment than stocks. There is no conclusive evidence.
Investing choices available
Investing choice is the set of options for investors to choose from. In case of real estate, the choices are limited. It can be either in land or building. The building could be home or commercial property. In case of equity investment, the choices are more varied and offer more choices to investors with a different risk profile. There have been discussions about introducing real estate investment trusts but there is no decision taken as yet. If this materializes, investors will have another good avenue for real estate investment.
Investors can invest in individual securities of companies after doing their study. They can also invest in index funds which track index such as Sensex, Nifty, Nifty Junior, sector indexes, others. The third way is to invest in equity oriented mutual funds and fund of funds that invest in equities. All these funds are offered by fund houses with a competent fund manager handling them.
Conclusion
Real estate and equities, both are great source of investment and building wealth in long term. Success in investing in these assets depends on the knowledge of the asset, inclination and attitude of individual investors, and understanding the key drivers of prices of these assets.
It is advisable to investors to understand various factors mentioned in this article and do more research to be able to judge the option more suited to the individual investing style.
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