Mutual Funds vs Commercial Property: A Diverse Investment Strategy
When it comes to making investment decisions, the age-old debate between mutual funds and commercial property is a hot topic. This article draws on the story of Mr. Rakesh Sir, who exemplifies the transformative power of a diversified investment portfolio.
A True Story: Rakesh Sir's Insights
Sr. Rakesh sold shares in Care Stock at a nominal price, only for his mother to advise him to invest in property. Using the subsequent experience, he advises that investing in wealth creation options like good mutual funds, Public Provident Fund (PPF), tax-saver bonds, and a small allocation to gold and silver can lead to substantial returns.
Investment Ratio: 60:40
Mr. Rakesh also suggests maintaining a balanced portfolio with a 60:40 ratio, favoring real estate to mutual funds. While real estate has offered impressive returns, mutual funds have shown a cyclical pattern every 8 to 9 years, where their value drops, often eroding all previous gains.
Investment Criteria: SLR, Safety, Liquidity, and Returns
As an investment planner, the author finds this question fascinating. When evaluating between real estate and mutual funds, the primary criteria should be:
1. Safety
The safety of the principal amount is paramount. While real estate has a generally stable nature, it varies case-to-case. Mutual funds, especially equity-focused ones, can experience volatility. However, with a well-researched approach, one can find funds with lower volatility. Equity-focused mutual funds, if held for at least four years, can offer exceptional returns, even considering significant market downturns.
2. Liquidity
Liquidity is a critical factor. Real estate can be illiquid, taking a long time to convert to cash. In contrast, mutual funds provide immediate liquidity, allowing redemption within 2-4 working days. Holding onto an asset that cannot be quickly liquidated is not practical if cash is needed.
3. Returns
This is the most crucial aspect for investors. Real estate returns are derived from rental income and capital appreciation. Assume an investment of Rs 1 crore in a commercial property, generating Rs 6 lakh annually (6% p.a.) with a 6% capital appreciation, resulting in a 6.6% return after four years. However, mutual funds, with a reasonable allocation across different categories, can offer returns ranging from 14-15%, ensuring tax-free growth and greater liquidity.
Investment Flexibility and Government Policies
Mr. Rakesh highlights government policies and the benefits of investing in mutual funds. The changing base rates and tax benefits of mutual funds make them an attractive option. For instance, Section 80C allows deductions of up to Rs 1.5 lakh with lock-in periods of just three years, a compelling advantage over real estate.
Moreover, the Infrastructure sectoral funds like "Franklin India Build Fund" offer an avenue to invest in real estate, providing a wide range of investment opportunities.
Conclusion: Manageable Risks Lead to Higher Gains
The author emphasizes that while it's easy to earn, retaining and protecting wealth requires patience and a diversified approach. By choosing between mutual funds and real estate, investors can achieve higher returns and a safer principal. Just as Rakesh Sir has shown, a strategic mix of different investment classes can lead to significant growth.
For those without the time to research, paying for the services of a financial and investment planner could be a worthwhile investment. The concluding line is succinct, encapsulating the need for investors to let their money work for them.