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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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A Real Discussion

Posted by Muthu on September 1, 2014

I happened to meet two friends from our industry today.

The conversation went around the year 2002 when all asset classes were at multi year low, with all round pessimism and gloomy global scenario after 9/11 incident.

We people who prefer equity are a tiny minority in this country. We feel equity is not given the right place it deserves in investors’ portfolio despite it being better than or at least on par with real estate.

We reviewed some presentations which had data as to real estate prices in prime areas of Chennai around 2002.

I chose Adyar for this piece. It’s because Adyar is the place I live. Few days ago ‘Economic Times’ carried data as to how Adyar is the richest locality in Chennai. We purchased the flat we live during the above period (2002-03). We paid Rs.2300/- per square feet for the 1000 Sq.ft 2 BHK we live in.

After 12 years, a similar flat (a new 2 BHK) is quoting around Rs.15,000 per sq.ft.

We paid Rs.23 lakhs in 2002, the value of which is Rs.1.5 crores now.

If I want to sell the flat, it would go for lesser than Rs.15000 per sq.ft as it is more than 10 years old. However for the purpose of this discussion and to the joy of real estate enthusiasts, let us assume we would be able to sell the old flat at the price of the new flat.

We took one fund in 2002. We choose Reliance Growth Fund since one of the friend was from there. The NAV of Reliance Growth Fund (RGF) as on 1’st January 2002 was Rs.19.75 It’s NAV as on August 28th 2014 was 668.19

RGF was once an excellent performer and turned out to be an average fund during last couple of years.

If I had invested Rs.23 lakhs in RGF instead of Adyar flat, it’s value would now be Rs.7.80 crores or say Rs.8 crores.

Unlike house where I’ve to pay 20% capital gains tax and where I would be getting lesser value than market price, in RGF there is no tax on the gains made and I get 100% of NAV (after adjusting for STT).

Out of the Rs.8 crores proceeds:

I can now buy a 3BHK+ 1 Study (2200 sq.ft @ Rs.15000 per sq.ft) for Rs. 3.3 crores in Adyar itself.

I can also buy any high end luxury car for around Rs.50 lakhs.

The balance Rs.4 crores, by prudently investing in instruments like MIP, I can withdraw 9% per annum. This means I get Rs.36 lakhs per annum or a nice pension of Rs.3 lakhs per month.

All we should have done is to invest in equity in early part of the career and bought the house in the later part.

I’m not against real estate. In my opinion, it has next best potential to equity.

Since we tie up huge net worth including decades of future income also into the house, we never get opportunity to create big wealth which equity is capable of providing us.

We need to debate if it would be wiser to create wealth during the first 20 years of career through equity and then go for owning a house.

This is just a thought. The idea may have merits and demerits.

To me, merits appear significant.

9 Responses to “A Real Discussion”

  1. ltinvestment said

    If Equity is at their low during 2002 due to many reasons, RE might be also lower or higher due to shift in assets. Also whether similar performace will be in other areas of chennai. Adyar has no fresh land, so the growth is muted. whereas Manapakkam, Velachery…etc are grown multifold than equity. but we dont have rate to assess exactly. I am not against RE or Equity. i am having both.

    • Ram said

      From now on the probability of Equity giving returns greater than Real Estate is more as prices in real estate has saturated and too expensive..

  2. shan said

    Assuming you did not buy the apartment, you would have had to pay rent. So in fairness, you should deduct that from the final value as well. Although, I completely agree with you that equity is a better investment.

  3. Prasad said

    To get that kind of returns you would have had to invest a lump sum of 23 lakhs in a mutual fund. now that is not advisable. what if the said fund had not performed well? so it is pointless to say that so and so fund performed well than real estate investment. buy a house if you need it. invest in equities regularly (SIPs and lump sump). certainly investing in equities can be profitable than investing in second home

  4. D.Vaz said

    Wow Muthu, You could’nt have made your point more strongly. Thanks for doing the Maths and enlightening sceptics. I’m with you all the way.

  5. Srikanth Achanta said

    that definitely drives home the message.

  6. […] The above incident resonates with what I wrote last month in ‘A real discussion’. […]

  7. Narayaniram said

    The comparison is made with an assumption that you had invested in the flat through cash of Rs 23 lakhs; not taken a home loan;

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