In the 71 years since India gained independence, the country’s real estate market has changed tremendously. While it has not always been consumer-favouring

Is investing in a house a good idea, or do I invest in mutual funds (no prior knowledge or experience)? I can invest up to ₹60K per month.

Thanks for A2A.

Firstly, I would like to understand if your are investing in a house for you and your family to stay or just as an investment into real estate?

For the former, I would suggest you invest in Mutual Funds in order to achieve an amount that would help you ease of your loan liability by saving up for a high lump sum down payment.

I’m sure people always dreamt of living in a home that they own. Independent villa or apartment, they need something that they can call as their own and it surely needs to be fancy.

Upwardly.in has a solution for the home buyers. All you need to know is how much your dream home costs today. Select from the existing goals we built for you or create a new one. Goal based investing is the best way to monetize and time ones dreams. It will help one to build new goals or chose from the existing ones and suggest a portfolio of funds after assessing their age, life stage, risk appetite and market conditions. This instills disciplined investing and monitoring to establish whether one is on track to meet their goals or not.

Here’s how you convert your dream to a home

Here is an illustration for a 2.5 Cr Villa after 7yrs. The salary considered is Rs 18L p.a. for a 29 year single male.

Rs.2.5 crore villa should cost Rs. 3.29 crores, 7yrs from today. One can always change this amount and goal duration before they choose from the portfolio suggestions.

Make your dream come true with just Rs 60,000 a month for 7 years with a Balanced Portfolio.

You can start investing for the minimum down-payment of 20% after 3 years. You are eligible for a loan of, approximately, 5X your post-tax annual income. (If your post tax income is Rs.10,00,000, you will be eligible for a loan of Rs. 50L.) Rs.2.5 crore villa should cost Rs. 3.29 crores, 7yrs from today. Our goal is to achieve 20% of this amount so that you can avail a loan for the remaining amount. Future price is based on real-estate inflation of 4%.

Coming to the former part of my question to you, i.e. if you are buying a house as an investment purpose.

For this, I would recommend you invest in Mutual Funds.

At Upwardly, we had made a study on Real Estate vs Mutual Funds. This will help you understand why mutual fund investments are superior.

Despite the various regulations introduced in India to tame the real estate market, now is not the right time to invest in real estate.

Investing in real estate is investing for the purpose of renting the space out/ selling it. Buying a home or building one for own use is not considered an investment in real estate.

An analysis has been done for the top 8 cities in India in the residential and commercial space. What we found out is not really promising.

1. Commercial/Office Market in India

The India office market has seen a dearth of supply in the recent past. The demand has been consistent over the years with a steady growth. This lead to low vacancy levels and upward pressure on rental income. The average rental values grew 3% YoY in 2017. The rental yields across India are in the range of 7-9%. The office market in India is predominantly occupied by IT/ITeS followed by manufacturing, banking, financial services and insurance (BFSI) and other services.

Despite a growth in average rentals, the rental yield in India is around 7-9% which is much lower than an average return of mutual funds (12%). With new developments in the real estate market, in the form of REITs, one can now invest in commercial office space with a minimum investment of Rs 2,00,000. Regardless of the convenience to invest in real estate market, in the form of REITs, the future of REITs is still unknown in the India market. REITs are supposed to roll out anytime soon in the India market. One can only hope a good return from these. But as of now mutual funds still remain the best investment product in the Indian Market even for real estate investments. Check out the Smart City & Infra Plan portfolio. The Smart City & Infra Plan portfolio invests in companies that will benefit most from Govt. spending on Infra. A Rs 5,000 SIP started 5 years (Rs 3,00,000) back would’ve reaped 20.20% return (Rs 4,96,000) by now.

Read more about the commercial/ office real estate market at our blog post titled “Office market soars across India, But is it good for investment?”

2. Residential Market in India

The Indian residential market has breached new lows in terms of supply and sales for every successive year of this decade. Despite the massive need for housing, India is facing huge unsold inventories. Here is a yield comparison made for top 8 cities in India with houses in the prime locations.

The houses in Chennai and Pune give a return above 3%. Kolkata and Bangalore fall next in line with an interest rate around 2.5% to 3%. Ahmedabad, Mumbai, Delhi and Hyderabad give 0.9%, 1.2%, 1.8%, and 1.9% respectively.

Whereas, in the US, houses in Chicago give the highest return of 8.8% followed by Seattle (8.2%) and New York (5.3%). In the UK, houses in Bristol gives the highest return of 6.3% followed by Manchester (6.2%) and London (5.3%).

India is lagging behind US and UK in the real estate market and clearly is not an attractive option for investment.

On comparing the returns of real estate from these countries it is observed that Indian real estate has high PE when compared to the other countries. A high PE, sometimes, means faster growth. Companies with high PE are anticipated to grow faster. Returns from Indian real estate are expected to grow more in the future. Currently, the returns are lower when compared to the other countries. Also, investing in Indian real estate could or could not yield a higher return in the future. During the short-term Indian real estate gives lesser return than US and UK.

The returns from the residential market are limited to a maximum of 4% in India. Mutual funds can give 15% annualized returns. Also, you can start investing in mutual funds with an amount as low as Rs 100 per month. With a large number of advisors in the market and various online platforms, investing in mutual funds is as easy as shopping online.

Read more about investing in real estate in my blog post titled Real Estate vs Mutual Funds”.

Invest in mutual funds though Upwardly!