Which is better FD vs. Mutual Fund vs. Real Estate Investment?
Short Answer
FD vs Mutual Fund vs Real Estate Investment has its advantages in terms of how much you invest and your investing period. Longer the period, higher the returns.
Detailed Answer
Here is a post based on a similar question on Quora on investing money in a house versus deploying money in a fixed deposit or Mutual funds etc.
Before we get into specifics here are General Principles to follow :
- We look at value created in long-term
- A bird in hand is better two in bush ( Liquidity is valuable and its ok to pay some premium for liquidity)
- When you cannot quantify risk it means you do not understand it fully
- Its always good to assign probabilities to outcomes so you don't plan for best case scenarios.
- With these principles in mind let us look at your problem and in fact any such problem
Option 1: You invest your money in Buying a house
So on day 1 your cash flow is -40 lacs and you have an equivalent asset. Lets analyze what have you got.
- An asset which is worth 40 lacs
- Depending on real estate growth it might grow by certain amount lets say 5 % annually.
- You might get some rental income lets say 10 k monthly from it
- You have some basic maintenance cost on the house maybe 3 k per month
- So your monthly net cash flow is 7k
- Let's say your rental income increases by 5 % every year
- So In 10 years, you will have an asset which has appreciated to = 40*(1+5%)^10 =65.15 lacs and you made an annual income of 84 k in the first year which increased at 5 % every year.
- For the rental income lets say your tax bracket is 20 % so you actually earned only 5 k net income per month and let's say you invest it in some monthly SIP or any other investment.
At 10 years you calculate the total value of your investment. Use a SIP Calculator to calculate value if it was only 5k standard investment it came to around 10.33 lacs all through but your investment will change as your rental income increases you can do an excel to calculate it will be let's say close 13 lacs.
So at the end of 10 years, you have 13 lacs in liquid cash + house which is possibly worth 65 lacs.
Now let's say the house is not that liquid so you want to discount the gains by 10 % as liquidity premium which essentially means the market rate is X but if you are ready to sell the asset for 0.9 X its liquidity improves multifold, so we are left with total value of 73 lacs
Here is the best way to get
Option 2: House financed by partly by bank rest of the money in FD
- You buy the same 40 lac house financed 75% by bank
- So you have 30 lac loan and an EMI of 27 K
- So you have the house and now you can earn the same rent as we discussed in the option 1
- You can use the rent to pay part of your EMI
- You can also deploy your money in a fixed deposit and get returns lets say 9.5 % as you say so that's 23750 monthly ( its approximated) will be a little less 20 % tax and it gets reduced to 19000
- So you can similarly build a simple cash flow excel as your rent will increase and in year 2 or 3 you will break even
Option 3: Chuck house Invest all in FD , invest proceeds in MF
- You chuck house and invest all your money in FD
- Returns are 19 k per month, you invest this money in aggressive SIP every month
- So at the end of 10 years, you will have your principle in FD 40 lacs
- This SIP if we assume 12 % return will be worth 44 lacs in 10 years
- So at the end of 10 years, you have liquid 84 lacs
Option 4: Chuck house invest all in MF Lumpsum
- Let's assume all of it grows at 10 %.
- At end of 10 years, you will have about 1.03 crores
Option 5: Chuck everything Put everything in FD at 9.5 %
- You will have pre-tax 94 lacs at 9 % annum FD
- Post-tax it will be different as tax gets deducted based on your hurdle rate.
Now, you can do your calculations and decide which is better Fixed Deposits, Mutual funds or real estate investments.
Ask Your Query for FREE, Get quick answers from our FINTRAKK community!
Discussion (2)
I'd personally choose mutual fund investments over investing in an FD, because mutual funds tend provide better returns on investment over the long return. So if an investor is willing to take some amount of a risk, they should definitely choose mutual fund investments over fixed deposits according to me. If you surplus amount of money with you, then you can choose real estate investment, but for periodic investments SIP investments in mutual funds are preferred over real estate investments.
Fixed Deposit (FD) are saving tools offered by banks to deposit lump sum amount for a fixed period of time on a higher interest rate than saving accounts. Mutual funds are investment products which pool money from numerous small investors to create a fund.
Liquid funds, a type of mutual funds which invest in different money market instruments. The withdrawals from these funds are processed within 24 hours and that's why these are regarded as liquid assets. The fund manager gets flexibility to meet immediate redemption requests.
The best investment plans in India for a year are to invest in fixed deposits, short-term funds, and ultra-short-term funds. These are less risky and produce relatively higher returns than banks.
Zerodha as well as Groww, both allow investors to invest in Mutual funds. Groww does not charge any Account opening fees or Annual maintenance Charges but Zerodha charges Rs 200 for Account opening and Rs 300 for AMC. This makes Groww a cheaper and better option when it comes to investing in mutual funds.
NRIs living in the United States can invest in Indian Mutual Funds, but there are some hassles that have to be overcome. You will require an NRE, NRO, or FCRN account in order to convert the foreign currency into Indian rupees, post which you can complete the KYC and begin investing in Indian Mutual Funds.
Government securities include both T-Bills (Treasury Bills) and Government bonds which are both short and long-term instruments issued by the Central & State governments for various purposes. Retail investors are allowed to invest in G-Secs provided by the RBI. One can buy them directly from the Stock exchanges in a non-competitive method.
There are multiple avenues through which a 15% p.a. return on investment can be made. These are through equity, mutual funds, fixed deposits, government bonds, and schemes, etc.
The introduction of Systematic Investment Plan (SIP) in the mutual fund is regarded as one the major breakthrough in the financial sector. It has helped to attract a new class of investors in the sector who were not comfortable to invest a lump sum at a time.
Equity and mutual funds are perfect if you want to invest in companies while seeing your money grow in a short period. Moreover, the chances of compounding your investments are higher. But the risk associated is equally greater considering the growth of companies and their performance in offering returns. But then keeping money in the bank is the safest way to keep your earnings. But then, due to inflation and low returns on interest, that value of the money kept might be cut down drastically.
Investors looking to invest in mutual funds without a Demat account can invest through financial institutions, independent financial advisors, AMC, and online portals.
Raghav Jha
Yes, I too agree with your point. Real estate involves lumpsum money that one can afford only if he has surplus amount. While mutual funds allow you to invest smaller amounts as per convenience. FDs these days give very low returns after tax. So, I would also prefer to go with Mutual funds only. At least I can withdraw my money when needed. There's a hope to get better returns as well.