We are slowly transitioning towards a generation of investors who are less emotional in their outlook towards their investments. For as long back as you can think, buying your own house has been one of the most significant financial/life goals you would have had. However, the new-age investor is being realistic about his investment in real estate and trying to break the age-old barriers by questioning the norms. He is constantly on the lookout for an alternative form of investment that fetches him better returns and also, saves him from the emotional trauma of being under debt. Case in point- Equity mutual funds. Here is our attempt to provide you with reasons as to why buying a home might not be the greatest of ideas.
Interest on a home loan- For a house that costs you 50 Lacs and assuming your loan amount is 80% of it, you shall end up paying more than your loan amount as additional interest. Hence, over a period of 20 years, while you are paying back your loan to the bank, you are paying an amount that is double of your actual loan amount. The illustration below might simplify it-
Added expenses- There are a ton of additional costs that come backpacking along with the home. Costs like monthly maintenance costs, property registration costs, brokerage, stamp duty etc. can account up to 25% of your monthly EMI amount. In the above case, it shall be Rs 8,930 per month bringing your monthly cash outflow to Rs 44,651 (EMI + other costs). In comparison, a mutual fund at max comes with a minimal fund management fee.
Liquidity- We all are aware of how tedious a process of buying or selling a house can be. It is not that you can wake up one morning, list the house and find a buyer the next day. However, you can easily do that with equity mutual funds, wake up one morning and decide to redeem it, that is.
Return on Investment-
We shall now compare the below two scenarios-
- A house worth Rs 50 lacs bought as per the home loan details stated in the illustration above and thereafter
- An equity mutual fund investment of Rs 50 lacs, with a lump sum investment of Rs 10 Lacs and a SIP of Rs 44,651 per month for the next 20 years
As can be seen, for the same amount of money invested, equity mutual funds give you returns that are almost 150% of the property value of at the end of the same tenure. Equity Mutual Funds prove to be a much more profitable vehicle for investment today so, let us be prudent in investing our money. Gone are the days when real estate investing was lucrative, it is better to invest in equities once you already own a house.
WealthApp advisors would be happy to help you with your investment portfolio, should you need any assistance.