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Real Estate Vs Equity Investing in India

Investing is a great way to prepare for one’s financial future, while also potentially building wealth. Two kinds of investments that have gained immense popularity in recent years include stocks and real estate. In this page, we will consider both investment avenues in detail and evaluate which one would be a suitable option for a user.

Difference Between Investment in Real Estate vs Equity Investment

Real EstateEquity Investment
MeaningThis involves buying, managing, renting and/or selling real estate in the form of land or constructed house for profit.This involves buying and holding of shares or stock in a stock market to generate income from investments, dividends and capital gains.
CostExpenses are associated with stamp duty, registration, society charges & maintenance & brokerage. These can vary from state to state.Most common forms of cost involve brokerage charges, securities transaction tax, stamp duty and other charges.
LiquidityOne cannot take money out easily. It isn't feasible to sell the property right away. The individual will have to wait until the market flourishes and then look for a suitable buyer to get the profits desired.High liquidity - an individual can exit the stock investments anytime during market hours.
Diversification There is no scope of diversification. A substantial amount of money will have to be invested in a lump sum or instalments for under construction property.There is the opportunity to diversify investments even with smaller amounts. One can park money in stocks of different companies, industries and equity instruments.

Returns in Real Estate vs Equity Investment

Real estate returns

Mainly, there are three kinds of returns on real estate investment - expected return on investment, required rate of return on investment and actual return on investment. Expected return is the amount of profit or loss a real estate investor expects to make from an investment property, which has expected or several known potential outcomes. Knowledge of required rate of return on investment helps real estate investors assess and evaluate investment properties before deciding whether or not they should buy them. In other words, it is the necessary minimum return the investor needs for considering a particular investment property. The actual return on investment is the money one gains or loses from an investment property during a period of time, in comparison to the initial value of the investment. In simpler words, it is the money that real estate investor actually receives from their investment in the said property.

Equity investment returns

Investments in equity funds are aimed towards generating high returns. The money will be parked in shares of firms of different market capitalization. The returns from equity investments can only be estimated, and there is no guarantee on the returns earned. Among the various categories, equity funds have been seen to deliver the highest returns. On an average, they have generated before-tax returns within the range of 10% to 12%. These returns, however, may fluctuate on the basis of market movements and economic conditions. It must be noted that an equity investor should not expect to earn a steady return annually, rather there will be ups and downs, which normally shall average out overtime. Should the individual diversify investments and hold a basket of equity shares, he or she must ensure to invest consistently and stay invested for the long-term across market cycles. The return is likely to be near the long-term average.

Why Invest in Real Estate

There are a number of reasons why an individual should consider investing in real estate. Here is a look at a few of them:

  • Real estate is viewed as a sure and secure investment option. This form of investment is both a long-term goal and an emotional asset for those who aim to have a property of their own. Although stocks and shares might fetch better returns over a three-to-five-year period, the risk associated with it is very high. Shares and stock prices can see huge variation even in a matter of hours, days or even a week, but real estate prices remains stable, and is therefore a safer option for investment over the long period.
  • Rental yield can act as a good yardstick in case of residential real estate. However, experts recommend that investors only get into it when the rental yield is over 3%. Real estate can take up to seven or eight years to double in value
  • Real estate asset never stops growing. After its purchase, the yield as well as returns tend to move up, varying as per location. Even if one puts it for rent, the capital price shall only continue to increase. Those seeking to build their retirement nest have the winning edge since they can leverage rental income until the 58 years of age or so and then sell it for a lump sum amount to acquire another property. In recent times, demand in the real estate sector has witnessed a lull, mainly on account of two major events – the enactment of Real Estate (Regulation and Development) Act in May 2016, and government’s call for demonetisation in the same year. While the two moves did come as a blow to many developers, it is expected to be beneficial to the sector in the long run. It must be noted that the sector saw some positive movements in 2018.

Why Invest in Equity Investment

One of the main advantages of choosing the equity route is the possibility to increase the value of the principal amount invested. This comes in the form of dividends and capital gains. Here’s a look at some of the reasons why an individual must consider parking money in equity investments:

  • There is potential for capital appreciation in case of equity investments. If the business makes a profit, it could reinvest them back into the company for additional growth through increased market share, new product development, or other growth strategies. When the company’s value grows, the market price of the stock normally increases.
  • For those who like to park money into various types of investment products, a stock market investment gives them the benefit of diversification. Values of stock market investments change independently of other investments, like bonds and real estate. Holding stocks allows one to weather losses of other investment products. While stocks add risk to a portfolio, there is also the potential for large gains, allowing investors to avoid risk-averse investment strategies.
  • When an individual purchases shares of stock, he or she is given an ownership stake in the firm from which the stock has been bought. This means that parking money in the stock market also provides benefits that are part of being one of the company’s owner. Shareholders can place votes on corporate board members and participate in certain business decisions. They are also eligible to receive annual reports that will enable them to gain a better understanding of the business. It should be noted that the element of risk is higher in case of equity share investment as compared to other investment like debts. The money parked in it is based on the faith that an investor has in that business. There will be no collateral security attached to it.

FAQs on Real Estate Vs Equity Investing in India

Is real estate a better investment than stock market?

There are advantages and disadvantages to both investment options. Real estate investments are a preferred choice among those looking for safer investments, while investors willing to take risks can consider putting their money in the stock market. Additionally, one can be assured that there is always going to be value attached to the real estate asset. On the other hand, investments of different nature can leave the investor with little to no tangible asset value, like a stock which can go down to zero.

Is real estate a good investment in India?

Over the past few years, the real estate sector in India has been witnessing big changes. Demand in the sector was at a still for a while, mainly on account of two major events – the enactment of Real Estate (Regulation and Development) Act in May 2016, and government’s call for demonetisation during the same year. Although the two actions had major effects, it is expected to benefit the sector in the long run. It must be noted that in 2018, the sector saw some positive movements.

Is it worth it to invest in equity?

In case of any kind of long-term investment, the risk-reward ratio is normally in favour of equity investments. An investor who is willing to remain invested for 5 or more years, can consider parking money in equity funds. It is not suitable for those seeking to invest for a relatively short-term, since the returns may not be very high owing to stock market fluctuations.

Are investments in real estate worth it?

Yes. Real estate investments can help in generating ongoing passive income. It can be viewed as a good long-term investment if the value increases over time. However, one must be prepared to put down a significant sum of money upfront to begin real estate investing.

Which is the best equity investment for long term?

Some of the best equity investments for the long term include IIFL, ICICI Lombard and Larsen & Toubro, Apollo Hospitals and Oberoi Realty.

Which equity investment is best for 3-year investment?

Investors seeking to park money into equity investments are generally advised to do so for at least five or six years. It is advisable to stay invested for the long term to fetch. Some of the stocks that one can consider buying include IIFL, ICICI Lombard and Larsen & Toubro.