The investment opportunities within the dynamic Indian financial market are widespread for investors and the choice between real estate and stocks often emerge as favourable investment avenues. However, choosing the right investment option often appears confusing for many investors, especially those who are at their initial stage of financial planning or new to the stock market.
Both real estate and stock markets cater to different financial goals and philosophies. But, deciding which one can be better for you goals and requirement could be a difficult choice. While real estate seems like a prudent investment, it is mostly outclassed in terms of liquidity, safety and financial returns offered by the stock market.
Real estate investment opportunities and factors to consider
Real estate investment in India is characterised by its surprisingly labour-intensive nature. Prospective investors need to be quite hands-on with the latest developments in the sector when it comes to real estate investments. While online property searches may initiate the process, the real work lies in conducting on-site visits to assess construction quality, validate legalities, and ascertain the developer’s credibility. Factors such as neighbourhood analysis and construction timelines assume critical importance in this landscape.
The realm of real estate investment comes with recurring costs, encompassing property maintenance, tax obligations, and utility expenses. Property acquisition through borrowing necessitates the repayment of EMIs and interest, which could inflate the property’s overall cost. Even in scenarios where rental income is generated, risks such as tenant unavailability and fluctuating rental values persist.
Another hassle in terms of real estate investment is the issue of liquidity. Liquidating real estate assets involves intricate procedures, spanning listing, buyer identification, and registration. As a result, an asset can only turn to liquid capital after a significantly long time.
Stock market investments
In contrast, stock market investment stands as a more accessible and streamlined option. If you are a new entrant in stock market it’s important to study, research and keep yourself updated about the latest information regarding the market and its many underlying factors. The silver lining is, compared to the real estate sector, for new investors it is far easier to start investing in the equity market. With the opening of a demat account and trading account, facilitated by reputable stockbrokers, investors can gain access to stock markets easily.
Although minor brokerage charges apply, the main issue in active trading in the stock market is actually achieving a profit. A SEBI report highlighted that only 11 per cent traders were profitable in FY22. While investors will likely not immediately start with day-trading, or even investing in futures and options, most novice investors lack the discipline to diversify investment across a broad portfolio, which is where real wealth creation is often found.
However, stock markets do offer one very large advantage over real estate – liquidity. Stock holdings can be swiftly converted to cash through a trading account, executed with a few clicks and minimal time investment.
Returns on investment and savings
Talking about returns on investment, while property buying remains a popular choice in India various studies have pegged the returns at under 10 per cent for a period of 10 years. In comparison, the SENSEX has grown by a CAGR of nearly 13 per cent for the past decade. Most mutual funds offer returns in the same range though outlier performers have given returns of upwards of 15 per cent for the past decade. When talking about the greater picture with taxes, the return disparity grows between the two even more.
However, most Indian investors aren’t buying properties just for the returns alone, but for passive rental income. However, the rental yield in India remains one of the lowest compared to other economies in the world. Rental yield, calculated as the percentage of your initial investment in property that you earn back in annual revenue from a property, stands well below 5 per cent in even major metros in India, according to reports. This is due to high initial costs for real estate purchase compared to the rent price.