Picture this: Two friends, Raj and Simran, are standing at the crossroads of life. Raj believes in owning a piece of land, a tangible asset, something that gives him the security of “My Home.” He decides to buy a house, paying an EMI of around Rs. 35k monthly. Simran, on the other hand, values flexibility. She opts to live in a rented house and channels her savings, Rs. 25k per month, into a Systematic Investment Plan (SIP) in equities.
Also read this popular answer i have a few years back here on Quora:
Ram Kalyan Medury · 6yWhat is the right decision, to live on rent for 20 years and start SIP in MF, or buy a home on loan for 20 Years?Let us take an illustration. Assumptions: * House rent Rs 10,000 per month for a house costing Rs 60,00,000. Rent increase by 6% every year. * Home Loan EMI at 9% interest rate is about Rs 45,000 per month. You stay on rent and save the spare cash into a diversified equity Mutual Fund scheme. You invest in the Direct Plan of the mutual fund. The fund gives you 15% per year over next 20 years. There are many such funds which have done so in the last ten years. Following table is the cash flow in both options on an Yearly basis. The summary is that you Value of MF holdings after 20 years becomes ₹ 3,77,73,665 whereas the value of the House after 20 years is ₹ 1,92,42,813 Benefit of MF over House = ₹ 1,85,30,853. We are assuming the monthly surplus is invested in one lumpsum at the end of the year. MF value will be higher if the surplus is invested each month. Here is the bar chart view of how the Value in any given year changes over time. One may argue that MF returns of 15% are very high. If you change it to 12% (very reasonable), then the surplus is 68 lakhs. And if you drop the 20 year return on Mutual Funds to 10% the surplus is still 11 lakhs. Conclusion #1: Clearly staying on rent is better as far as the numbers speak. Impact of broker commissions: If you do NOT invest in Direct Plan Mutual Funds, then broker takes about 1.5% commission. In such a case the surplus reduces from 1.85 crores to 1.21 crores. This means broker commissions are as much as Rs 64 lakhs! Conclusion #2: Investing in Direct Plan Mutual Funds is far more profitable (to you, not the broker). What about the Sentiment and Emotion? Of course one needs to weigh this with the emotional and sentimental reasons of owning a house vs renting. It is hard to say no when the heart wants to stay in “Your Own House”. But keep these other factors in mind too: * Are you somewhat of a nomad in your early career years, or * Want to go back to your home town, one fine day * Want to go retire at a farm house or a hill station * Wish to keep moving to a ‘bigger house’ every 5 years, In such cases it makes sense to stay on rent and invest the surplus. When the time comes, you can buy a nice house in your choicest locality, after having explored the world! Conclusion #3: It is a battle between the head and the heart. Read more: 3 Reasons to Switch to Mutual Fund Direct Plans – Jama https://www.jama.co.in/six-tips-free-lunch-investing-asset-allocation-rebalancing-mutual-funds Note (updated): 1. I am ignoring LTCG for now, the impact will be minimal even if one withdraws the entire corpus in a single year. The MF gap over the house value would still be abbot 1.5 crores. LTCG exemption limit may likely be raised from 1 lakh to an inflation adjusted amount in 20 years. 2. Home loan is also partly exempted from income tax upto a cap of Rs 2 lacs. This doesn’t change the math significantly. 3. Assuming a lower return on MFs say 12% will still bring down the gap to Rs 67 lacs. Long term i.e. 20 yr investments need to compared with equity class. 4. Renting a house for long term may involve costs of shifting every 3–5 years to a new house (part of the adventure!). For some their employer may cover such relocation costs.
The Home Ownership Path: Raj’s EMI of Rs. 35k, when viewed over a span of 20 years with an average home loan interest rate of around 7%, amounts to a significant sum. The value of his home, though, appreciates. Historically, real estate in India has appreciated at an average rate of 7-10% annually, but this rate can vary widely based on location, infrastructure development, and other factors.
- The SIP Path: Simran’s SIP of Rs. 25k monthly, if invested in a diversified equity mutual fund delivering an average return of 12% annually, grows substantially over the same period. The power of compounding plays its part, and her wealth multiplies.
“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett. This quote aptly captures the essence of Simran’s strategy. She’s not just saving; she’s growing her wealth. But the crux lies in her patience and trust in market dynamics.
Considering the numbers alone, Simran’s SIP might outperform Raj’s real estate investment over 20 years. But numbers are just part of the story. Owning a home offers emotional security, pride, and stability that an SIP can’t replicate. On the flip side, Simran enjoys the flexibility of moving, potential better cash flow, and possibly higher liquidity with her SIP.
To sum up, both paths have their merits. The decision is deeply personal and hinges on one’s life goals, risk appetite, and values. The LSG framework (Liquidity-Safety-Growth) of Jama Wealth can aid in understanding where these choices fit in one’s financial journey. And always remember, a balanced approach might be the golden mean. If seeking counsel on making informed choices, Jama Wealth’s portfolio management services and associated investment advisory services stand ready to guide you.
