LONG-TERM INVESTMENT AS COMPARED TO REAL ESTATE AND GOLD INVESTMENT

If a friend tells you that he is buying small quantities of gold every six months, or has just put down a deposit for a new house, you would consider him or her a very wise investor. On the other hand, you might be forgiven for thinking that an investment in mutual funds is fraught with risk and might come crashing down any time. These are the traditional ways we have been conditioned to look at these three modes of investment. But there might be more to it than meets the eye.

If you consider the last decade from 2009 to 2018, you would see that the Sensex has given an annualized return of about 17% per annum, whereas gold has appreciated 12.9% in the same period. Real estate has fared slightly better than gold, providing 13.4% growth per annum. These figures have not been normalized for any other political, financial, or other occurrences that took place in the last decade, like elections, demonetization, GST introduction, droughts, border skirmishes etc. etc.

Someone could argue that the last 10 years, which is the reference point of the above three numbers, also includes the gloomy days of 2008-2009 when all stocks were at historic lows, therefore the growth seen in 2018 is calculated on a lower base. But my response to that would be that in 2008 the overall situation was so bad that even real estate and gold prices were quite subdued, and hence the low-base effect would be applicable to all 3 asset classes.

If you stretch the period under consideration further back, say for the last 20 years, the numbers are put into a better perspective. Equities have provided 12.9% annualized growth in 20 years, gold has grown at 8.4% whereas real estate has grown at only 6.2%. Just to put things in perspective, the same 20 year period in USA gives us the following numbers – the Dow Jones has appreciated by 1255%, whereas the price of gold in USA has grown by only 335% in those 20 years. So the better returns from stock markets are true all over the world, not just in India.

Also, for real estate and gold, the liquidation is nowhere near as simple as a mutual fund you own. If you operate your mutual fund yourself through the website of an AMC, then it is simply a matter of a few minutes to redeem your units, and you could expect your bank account to be credited within the next 3 working days. Even if you need to submit a redemption request at an AMC office, you should usually get your money in 7 working days. On the other hand, if you want to sell your property or gold, it is usually a much lengthier exercise.

Now that we have established that mutual funds are better long term investments than either gold or real estate, let us also look at some standalone benefits of mutual funds as compared to buying stock yourself :

  • It helps you invest in stocks of different industries and market capitalizations. Buying stock directly might not leave you with enough money to invest in all kinds of stocks.
  • You can protect yourself against specific risks of certain stocks.
  • Your reach is greater across stocks with a lower outlay. To individually buy all those stocks which a mutual fund is invested into would require a lot of money.
  • You can sit back and let the fund manager do the necessary research to invest the money correctly, instead of having to spend time and effort tracking business trends.
  • If you go for a monthly investment in mutual funds by going in for SIPs or SWPs, you would be able to average out your risks and take advantage of highs and also get buffeted against lows.