Q. Which will yield better returns in the long term—equity or real estate?
When it comes to long-term investments, both equity and real estate have their own advantages and disadvantages.
The stock market has historically provided higher returns than real estate. However, the stock market can be volatile and vulnerable to market fluctuations, making it a higher-risk investment. Real estate investments are less volatile and can be a good bet during periods of economic downturn. However, real estate investments need huge capital, unlike equity.
One of the main advantages of investing in the stock market is the potential for high returns and liquidity. Long-term investing in the stock market will also yield the benefit of compounding as you earn returns on your returns plus the initial investment. A diversified portfolio of stocks can expose investors to a wide range of companies and industries, which can help spread risk and increase the chances of long-term gains. This may not be the case with real estate.
Real estate can provide a more stable and consistent stream of income through rental properties. This can be especially advantageous for investors who are looking for a steady source of passive income. However, there is the companion risk of vacancy loss.
Additionally, real estate can act as a hedge against inflation, as property values tend to increase over time, especially in areas with strong economic growth. Pre-tax rental yield in India ranges between 1.5% and 3%. While this is not very high, there is capital appreciation as well. Capital appreciation, rental growth and yield depend on various factors such as location, the level of economic development in that location, volume of moving population, accessibility, infrastructure development, etc.
Real estate investment can be affected by a decline in property values, especially during periods of economic downturn or recession. Also, real estate investments are highly illiquid. It can take a while to sell a property and access the funds invested in it.
We recommend limiting real estate investments to not more than 25% of your overall portfolio. There is no need to always buy real estate in physical form. There are real estate investment trusts (REIT) that provide liquidity and returns at the same time.
It's important to consider your personal investment goals and risk tolerance when choosing between equity and real estate. There is no one-size-fits-all answer when it comes to investments.
The ideal way is to build the required financial portfolio as per your goals and liquidity requirements. Then, as a part of asset allocation, look at having a smaller chunk of real estate. Always consult a financial advisor or professional before making any investment decisions.
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