Invest in Mutual Funds or Buy a House?

real estate vs mutual funds

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I will focus on money growth for this article as it is sole purpose for the question. If you want to buy a home for a place to stay along with your family then it cannot be an investment. If it is meant for renting or selling out after some time, then it is an investment. To invest in mutual funds is also a good idea if you want to accumulate a solid corpus.

Buying a house or to invest in mutual funds are both good for building wealth. But we need to find out which is the better of the two.

Take this case:

Mr. Nair wants to buy a home for building wealth.

Buying Home Route

Mr. Nair has zeroed in on a Rupees 25 lakhs appartment in the outskirts of a tier 2 city in India. He applies for a home loan and gets it sanctioned at 8.50 interest rate.

He pays Rs. 5 lakhs as down payment.

The loan tenure is 20 years. His EMI will be Rs. 21,696.

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At the end of the tenure he will be paying Rs. 27,06,939 as interest and total along with premium, he will be paying Rs. 52,06939.

By Rent he will earn say Rs. 20,00,000 in the 20 year period. But maintenance will cost him say Rs. 5,00,000 in that period. So he will earn Rs. 15,00,000 in the 20 year period from rent income minus maintenance.

So effectively he will be paying Rs. 37,06,939 for the home.

Total value of the house after 20 years assuming 6% appreciation will be Rs. 81,00,000.

If he finds a buyer after 20 years, he will get Rs. 81,00,000. His profit will be Rs. 43,93,061.

Invest in Mutual Fund Route

Mr. Nair invests the Rupees 5 Lakhs which he had, in a Mutual Fund giving 13 per cent per annum interest. At the end of 20 Years, he will build a wealth of Rs. 57,61,544

He invests Rs. 22000 as SIP in a historically performing Mutual Fund giving a yearly return of 13 percent over a period of 20 Years. In 20 years, he will have invested Rs. 52,80,000(22000 x 12 months x 20 years).

At the end of 20 Years, the corpus generated will be Rs. 2.5 Crore.

In total, he invested Rs. 57,80,000(Rs. 5,00,000 lump sum + Rs. 52,80,000 through SIPs) over a period of 20 years.

Total Wealth accumulation after 20 Years will be Rupees 3.10 Crores. Profit will be Rs. 2,52,20,000.

More Potential in Mutual Funds

Some mutual funds can give more than 13%. However, it depends on the market situation and there are risks involved. Mutual Funds perform better if kept invested for a longer period of time. The magic of compound interest works wonders.

For the best mutual funds, you can refer to the following link:

http://www.moneycontrol.com/mutual-funds/top-rated-funds

Liquidity

Another advantage of mutual funds is liquidity. You have to find a buyer to liquidate your home but in the case of mutual funds, you can liquidate it whenever you want.

Verdict- Buy Home or Invest in Mutual Funds?

Both are good investments. Buy Home as an investment only if you want to rent it out and then sell it after some years. Invest in Mutual Funds and reap benefits for a longer period of time. One can do both and thus diversify their investment portfolio by not putting all their money in one place. The key is to be patient for the money to grow by itself after investing in Property or in Mutual Funds.

Watch video:-

I have explained this concept in Hindi in the video below which is uploaded on Money Growth Guru Youtube Channel.

 

 

 

 

 

 

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