Equity may not deliver returns that real estate would offer

Date : Dec 26, 2012

want to build a corpus of Rs.50 lakh to buy a property in the next 8-10 years. If I save Rs.22,000 per month, will I be able to reach the target? Which are the funds that I should invest in for maximum returns? I am a conservative investor and will be comfortable with low-risk funds.
-Ravi

If you save Rs.22,000 per month for 10 years, you will be able to accumulate Rs.26.40 lakh as principal value. At an earning rate of 10% per annum, you will be able to achieve a corpus of Rs.45.4 lakh. You will still be short by Rs.4.6 lakh and this is when the expected return is taken at 10%. As you carry a low risk profile, a 10% return may not be achievable. If you take 9% as the expected return, the total net worth becomes Rs.42.90 lakh increasing the deficit to Rs.7.1 lakh. Also, going forward the expectations that interest rates will reduce is high and you may see a low interest regime.

Hence, it is advisable that you take some exposure to risk. You can keep the risk exposure moderate and consider putting 30% of the total investments in the equity asset class. This is prudent as 10 years is a good tenor to invest in higher risk asset classes, which can help achieve inflation-adjusted returns.

You can consider investing in mutual funds. Funds that you can pick are debt assets-dynamic debt and long-term bond funds. Here, Birla Sun Life Dynamic Bond Fund and Templeton India Income Opportunities Fund are good options. You can also go for monthly income plans (MIPs), which take 5-30% equity exposure. Reliance MIP in the moderate space and Birla Sun Life MIP II Savings 5 Plan in the conservative space have been consistent performers. Among balanced funds, you can choose between Tata Balanced Fund and HDFC Balanced Fund.

However, one aspect that is not clear is whether you have considered the appreciation in real estate over the next 10 years. The value of the property, which is for Rs.50 lakh today, may double or become even higher in 10 years from now. And just considering inflation may not be enough to save for that. So how do you combat that?

While equity investments provide an advantage, they may not deliver the returns that real estate offers. What you can consider is investing in a property immediately. You may not be able to buy the property you are targeting, but then you will be in the same asset class and irrespective of the property prices going up or down, your corpus will give you the same value of money. The flip side is you may need to pay some cash and take a loan for the balance and hence there will be additional interest cost to pay. Not an easy decision to take but buying property is never an easy one.

Source: http://www.metroplots.com/news/equity-may-not-deliver-returns-that-real-estate-would-offer/?act=detailednews&news_id=2043