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

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40,000 times in hundred years= 11.3%

Posted by Muthu on August 7, 2016

I was reading this article written by Vivek Kaul.

A bungalow in Nepean Sea Road, South Mumbai was bought for around Rs.1 lakh in 1917. It is now going to be sold for Rs.400 crores. The value of the bungalow has multiplied by whopping forty thousand times in 100 years.

Real estate is always discussed in terms of how many times it has multiplied. Rarely anyone in that industry calculates XIRR or annualised returns. 40,000 times in 100 years when expressed in terms of XIRR is 11.3%. Not a bad return at all. But nowhere as glamorous as saying 40,000 times.

Many tell me something like that the property they bought 25 years ago has multiplied by 10 times. Sounds fantastic. But the annualised return works out to 9.6%.

When I say Birla Sun life Tax Relief’96 has provided around 26% returns in last 20 years, it doesn’t sound much sexy. When I rephrase that the fund has multiplied wealth by 100 times in 20 years, it suddenly looks very attractive.

Generally, we the advisors always talk in terms of annualised returns. If I say, you may expect around 15% annualised returns from equity over next 20 years, what it means is that the money getting multiplied by 16 times.

Do one thing. Use the simple function in excel or a financial calculator to calculate returns in terms of XIRR. An exotic 10 times in 25 years would be converted into a modest 9.6% XIRR. Comparison between asset classes would become meaningless if not measured in the same way.

Learn to measure everything in terms of annualised returns. This would not only impart better financial literacy, it would also reset your expectations to more realistic levels. If a prime property in Mumbai can ‘only’ deliver 11.3% over 100 years, you would learn to be contended with 9% annualised returns from your real estate investments.

The 2004-07 bull market in stocks, the 2004-09 boom in real estate are more of exceptions than the rule. As I’ve mentioned before, in the long run, you may set your expectations as follows:

Fixed Deposits: Inflation + 1%

Gold: Inflation + 1.5%

Real Estate: Inflation + 3%

Equity: Inflation + 7%

Next time when you meet me, let me know how much annual returns your real estate investments has delivered over last 2 decades.

The number may surprise you.

11 Responses to “40,000 times in hundred years= 11.3%”

  1. Rahul Sikarwar said

    How to I Earn 2 Crore within 20 year,Where should we invest and How much, please tell me i am Waiting your Reply

  2. balaji j said

    sir, the article is a eye opener for those who invest in real estate blindly without the knowledge of real return. equity always the best asset class in terms of return and liquidity.

  3. Siddhartha said

    Very interesting post. Never realised earlier that a property bought 25 years ago said to have multiplied by 10 times is actually an annualised return of 9.6%.

  4. Ajay said

    Eventhough majority of my sinvestment is in equity and have been investing and holding for last 12years, in the last 17years my land price has multiplied from 7 Lacs to 2crores. Hope it’s one time return and equity pays the same return within next 10 years.

  5. […] This hard hitting article is written by D. Muthukrishnan (Muthu). The original post can be found here. […]

  6. sathish Nagarajan said

    Basic article for beginners in financial life. Thanks sir.

  7. Vivek Ram said

    Both Mr.Vivek Kaul and Muthu have done a miscalculation.. To Compare Birla Sunlife Tax Relief 96 and the bunglow at napean sea road. we should use Risk-adjusted CAGR.

    Equity investment are totally different from other investments. Equity asset prices & Returns are volatile. Hence it is advisable to use Risk-adjusted CAGR. because the CAGR does not reflect investment risk.

    Risk-Adjusted CAGR = CAGR * (1-Standard deviation)

    Birla Tax Relief ‘ 96 Standard deviation is 15.29

    so Risk-adjusted CAGR = 26*(1-15.29) = -371.54

    But the property price in question would have been seldom volatile…so when an Investor needs to liquidate he can be sure that his capital is safe. But real estate has liquidity issues but not crisis..

  8. Prabhu said

    Need details about your services

  9. jcsunil said

    Sir, You didn’t consider the rent generated for that real estate in CAGR calculation for those 100 years. Also the amount you get if the rent is reinvested.

  10. Rahul P said

    What about the monthly rent you would get from real estate (minus maintenance cost)? Or maybe payable rent saved?
    I don’t see same appreciation as earlier but it has been fairly good considering many funds/ stocks even went down completely.
    I find it important for diversified investment.

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