Think Equity is the only option to invest in? Or, want to opt for an alternative way to invest your money? Or, are you confused when analyzing stocks vs. real estate investment historical returns in India? Look no more. Read this article for a detailed understanding of equity and real estate investment.
One of the best ways to make your future financially stable is investing. Today, there are more investment strategies than just stocks and shares.
Individuals can choose to go for investment options that fulfil their needs and align with the objectives and goals behind the investment. Moreover, investing highly depends on the risk tolerance and situation of the market.
But how can one decide between stocks and real estate? Below, we have put down all you need to know about both the avenues for investing and consider the reasons to choose the most suitable.
Real Estate vs. Stocks, India: An Overview
Over the years, two of the most trusted and exciting investment strategies are real estate vs. mutual funds and direct equities. Traditionally, investment meant putting your money into equity funds and other options in the capital market. While it turned out to be profitable, investing in real estate is also considerable. It offers diversification, yields a high return on investment, and has low-risk opportunities.
Why and how to invest in real estate property?
Investing your hard-earned money in real estate is a choice that depends on various factors like financial soundness, the level of risk tolerance, or simply the investment pattern of the individual. Purchasing a real estate asset is acquiring a tangible piece of land or property that the owner can control and maintain, such as a building or an apartment.
The return for this investment is earned from stable and regular income rents. Typically, value lands and buildings always appreciate, making it a profitable investment. The real-estate property also acts as leverage during future investments. When a real estate investment is leveraged, it is done with borrowed capital or debt to maximize its return.
The most common way to leverage your investment is to use your own money or obtain a mortgage. If real estate values rise, leverage works for you, but if they drop, it can lead to losses. Consider mortgage payments, vacancies, and a tough economy when making investment decisions to avoid leveraging risks.
Some of the factors to opt for investment in real estate are as follows:
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A secure investment:
Real estate properties are expensive, and one does not buy them daily. The price and real-time value of stocks and funds vary every hour and may alter within a few minutes. But, the value of the real estate will only grow. This makes real estate investment in India a much safer and long-term investment.
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Return on investment is recurring:
Once you have invested in the real estate, you can give it out for rental purposes. Rents are regular and frequent income for an individual. This is one of the safest and most stable forms of earning a return on investments. Depending on the market’s demand and property location, you can rent it for residential or commercial purposes.
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The value of the investment will only grow:
The rent earned on real estate properties will vary with location. For instance, rental properties in Mumbai will differ from Lucknow or Kolkata. But the exciting part about investing in real estate is that the property’s price will keep increasing with time.
For example, individuals planning to build a perfect retirement home for their spouse and themselves can earn the benefit of the property through rent until they retire. One can later choose to either reside in the property or sell it to acquire more property in the future.
Why should one invest in equity funds?
People throughout history have opted for investment in equity and other capital funds to increase the principal amount of the initial investment through dividends and capital gains. When individuals choose to invest in equity funds – they purchase a small share of the company.
This type of investment returns the money in two possible ways – via the increase of the value of shares of the company over time or through dividends given by the company to its shareholders.
We have listed a few reasons why one can choose to park their money in Equity:
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Possibility of increase in principal value:
If the company whose shares you own does well in the market and can increase the capital value of the equity – one gets the opportunity to re-invest the money back with more shares in the company or invest in better products or opt for other options for investing. This is because the company’s value grows in the market; usually, the price of stocks will also increase, allowing investors to profit.
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Allows diversification in investment:
Are you the one who likes to opt for more than just one option for investment? Well, then investing in Equity will provide the required diversification for you. Why? Money invested in stocks is based solely on the capital market and is independent of other investments—such as real estate or securities.
This makes holding equity beneficial, as it may act as a source to cover the losses (if any) on other investment strategies one may have. In addition, even though it is highly volatile, it still holds the potential to give high profits to allow investors to ignore the risk.
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Sense of ownership:
When individuals buy shares or stocks of a company, they are entitled to ownership of that stake. By investing money into equity, one can benefit as a shareholder. They are eligible to cast votes, participate in decisions, and receive internal annual reports to understand the business environment deeper.
However, it should be highlighted that the risk is higher when one parks their money in equity-based solely on instincts and trust the investor has towards the company and its activities.
What is the fundamental difference between real-estate and equity investment types?
Every investment opportunity comes with its own set of factors that define it. Some investments are huge in amount and risk, but they offer an impressive return to the investor.
On the other hand, we have options to trade our money for lower risk and stable returns. Similar factors govern your investment journey for real estate vs stocks in India.
Here’s an overview of the difference between real-estate and equity investment types:
Risk-Taking
Risk is one constant factor in your investing possibilities, such as Equity vs Real Estate. One of the common threats to both equities and real estate is improper research. You can’t just go in and expect to see results right away. If your pre-investing research takes a back seat, you can lose your hard-earned money.
On the other hand, real estate is a complex asset to liquidate, and it is difficult to cash in rapidly. In addition, owners of rental properties face hazards associated with handling maintenance, rentals, time management, and the stress of dealing with renters.
You may want or need to hire a contractor to cover for you. However, this may result in a decrease in your profits. In addition, gaining an average return in the stock market is exposed to various hazards, including market, economic, and inflationary concerns.
First, stock prices are susceptible to market swings. Thus their values can be pretty volatile. Geopolitical and company-specific developments can both generate volatility.
Stocks are affected by the economic cycle and monetary policy, regulations, tax adjustments, and even changes in a country’s central bank’s interest rates. Lack of diversity in the portfolio might also be a danger.
Cash Flow
You purchase tangible land when you invest in real estate. Therefore, real estate will cost you some money every month. Rental houses and storage sheds are examples of cash-generating real estate.
This rent money can provide a consistent, predictable income flow monthly. The cash flow from stock investments is not the same as that from renting out your own home.
Most of the money you make from stocks comes when you sell them in the long run. On the other hand, investors receive some cash in dividends.
Management Cost
Real estate might cost you money every month in taxes, utilities, and insurance if the property is idle. In addition, you may lose money month after month if you have a higher-than-usual vacancy rate due to circumstances beyond your control.
Time and Effort
Compared to equities, real estate necessitates a great deal of hands-on effort. As a result, you are frequently confronted with managerial issues. Even if you employ someone to look after your home, you’ll need to meet and supervise them regularly.
While purchasing a stock, you are purchasing a portion of a corporation. But unlike running a small business, owning a piece of a firm through stock does not necessitate any effort on your part, save from investigating each company to see whether it is a good investment. You profit from the company’s success but are not required to work.
Return
The ultimate goal of any investment is to receive maximum returns. The best one could ask is to earn maximum return within a shorter period. The returns on investment make the most sense when it is clubbed with the benefits of the investment.
Putting your hard-earned money into equity may or may not give you the expected return on investment as it is unpredictable and volatile. However, comparing the return on investment of stocks with real estate is not easy.
It is like comparing apples and oranges—all factors affecting the price and demand are completely different. The price, the value, utility, and returns are distinct. One can only have a basic idea with the difference in return.
The Bottom Line
Real Estate
Every real estate investor knows they can leverage the capital gain on investment and have additional benefits. Even though it is not close to the liquidity nature of the equity, real estate has historically allowed investors to earn a high amount of passive income in the long term and holds the ability to appreciate value over the years.
However, one should remember that investing in real estate brings a considerable pull on money. Therefore, one may have to secure financing help and a down payment if they fall short of making an all-cash deal while investing.
Moreover, real estate properties are something you can’t sell off within a few hours or days. This makes it unreliable during a financial crisis or an emergency. One should also know that the management cost incurred for real estate is higher concerning its repair and maintenance.
In a gist, the pros and cons of parking money into real estate are:
Pros:
- One can earn a side or passive income through rentals of real estate.
- Various tax benefits in real estate are not present in equity.
Cons:
- Purchasing a real estate property requires much more effort than buying equity.
- Real estate investment is costlier than equity and is not reliable for emergencies.
- The cost of the transaction of ownership is costly and time taking.
Equity
Now that we have learned about investing in real estate and the stock market – we are ready to look into the pros and cons of the two channels of investment equity offers.
For investors in the capital market, parking their money into stocks does not put a heavy crunch on their finances—this makes it a much more suitable investment source.
Due to the ease of liquidity, stocks can be purchased and sold quickly in the market as per the owner’s convenience, making them reliable in times of financial crisis or emergencies.
Also, the stocks and equity funds are available in various categories, allowing investors to build a diversified investment portfolio over the years.
Also, equity has a volatile nature compared to real estate, making it riskier for any investor and may turn into a panic whenever the market fluctuates.
Secondly, while dealing in equity, one tends to buy and sell rapidly as per the market conditions, increasing the tax burden on capital gains for the investor. Typically, an investor needs to invest huge capital to get better returns, which may not be affordable for everyone.
In a gist – some of the pros and cons of investing in Equity are:
Pros:
- Equity is highly liquid, whereas real estate cannot be purchased or sold immediately.
- Equity allows options for diversification of funds.
- The transaction expenses of Equity are low compared to real estate.
Cons:
- Investing in Equity is much riskier than in real estate.
- Equity may or may not continue to grow, but real estate will only grow yearly.
No matter what your current life plans are – whether it is planning the perfect retirement, saving funds for your child’s education, or simply maintaining enough residual income – always take out enough and invest! Look for investment opportunities that align with your goals, and start today!
Pro tip: Start investing through a platform that brings goal planning and investing to your fingertips. Visit Kuvera to discover Direct Plans and Fixed Deposits and start investing today.
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