“Who can be wiser than me? I had purchased a land for Rs. 12 Lakhs in 1996. I recently sold it for Rs. 1.12 Crore. This is what I called wealth creation. And this is possible only in real estate.” Said Dinesh, a 38 year old businessman to his friend Akshay.
“That’s wealth creation in true sense. But why do you say its possible only in real estate.” Asked Akshay.
“What should I say then ? Is there any other investment avenue that could create this kind of wealth for me? An FD would have fetched me 8-10% kind of returns. Even your mutual funds, stock markets etc can give me 20-25% kind of returns. May be gold could have been 2-3 times of Rs. 12 Lakhs. But nothing else would give a wealth creation of 8 to 10 times.” Said Dinesh.
“Its the way we look at it, Dinesh. You are comparing the start value and end value of one asset with the CAGR return of the other. How will you get the right comparison then?” asked Akshay.
“I didn’t understand. Please explain it clearly.” Said Dinesh.
“See, you are saying that you purchased the flat for Rs. 12 Lakhs in 1996 which has a current market value of Rs. 1.12 Crore. Now if you have to compare with other asset classes, lets find out, how much that would be worth today, if you had put the same Rs. 12 lakhs in them in 1996.” Said Akshay.
“Hmm, fair enough, please go ahead. I think I agree with you till here.” Said Dinesh
“So now, let’s assume that you had put the same Rs. 12 Lakhs in an FD at that time. Taking into account the changes in interest rates that have taken place, and going by your figure of 8-10%, lets assume that your money grew by 9% p.a. all these years. So today, it would be worth Rs. 43.7 Lakhs. Whereas, if you had invested Rs. 12 Lakhs in gold in 1996, it would be worth Rs. 73.2 Lakhs today. ” Said Akshay.
“See, I told you. Whichever way you look at it, it is going to be less than real estate. Gold is better than FD, but nothing has beaten real estate” Said Dinesh confidently.
“Hold on Dinesh. We are yet to look at one more asset class. If you had invested the same Rs. 12 Lakhs in an equity MF like HDFC Top 200, then can you imagine what it would be worth today ?”
“No, tell me what it would be?” asked Dinesh Curiously.
“It would be worth Rs. 2.28 Crores today. More than double of what you earned from your flat.” Said Akshay.
“Ohh is it ? But, it could be a one-off case Akshay. Tell me, if any other fund has done it.” Asked Dinesh.
“Why not? If you had invested the same Rs. 12 Lakhs in Reliance Vision Fund in 1996, then it would be worth Rs. 2.52 Crores. If you had invested the same amount in Birla Sunlife Equity Fund, then it would be worth Rs. 2.64 Crores. And if it was Reliance Growth Fund, then the Rs. 12 Lakh would have become Rs. 4.56 Crores today.” Said Akshay.
“Ohh !! Now, that’s awesome wealth creation Akshay. How come I never came to know about it ?” asked Dinesh.
“The problem is, when it comes to real estate, we remember the total purchase cost and then we hold it for a long term and finally we remember the selling cost. So we can feel the growth.
Also, since it is a little tedious process to keep buying and selling real estate in short term, we prefer to hold it for a long term.
However, for mutual funds or equities, we remember the per unit price or the per share price and sell it as soon as we get some returns in it. As equities / mutual funds are easily redeemable and come with lot of liquidity, we just keep buying and selling them. As a result, we think that equities and equity mutual funds can generate small returns but cannot create wealth.
Also, in earlier days, due to the entry load of 2.25% in Mutual funds, MF agents also encouraged us to keep selling our units every now and then to invest the profits in some other mutual fund. His motive to do so was to earn a commission of 2.25% every time you transacted.
But actually, if you held on to the right stock / mutual fund for long term, you would create much more wealth than real estate.” Said Akshay.
“Thats crazy !! Ok, One more question. I am sure, its only a few mutual funds which have created this kind of wealth and not all. How do we make sure that we have chosen the best mutual fund ?” asked Dinesh.
“Find an expert !! Find a good financial advisor who is truly an “advisor”. He can study your risk profile and suggest you to invest in the best fund. And also remember the most important fact about investments. Investments are like trees. You need to give them time to grow. If you look at any of the above asset classes (except FDs), they all have grown phenomenally because the investment was a long term investment. So diversify your portfolio across asset classes and your wealth would multiply automatically.” Said Akshay.
“Thanks for sharing all this knowledge Akshay. I have now understood that:
1. Always invest for long term.
2. All asset classes have their own benefits. So have a diversified portfolio.
3. Take professional help for the above.”
We look forward to your feedback and comments on the above article.
(The views mentioned in the article are personal opinion of the author. The characters used in the article are hypothetical).
The Author Prof. Saurabh Bajaj (BE, MBA, FRM) is Chief Investment Planner with Nidhi Investments. He can be contacted on saurabh@nidhiinvestments.com for any questions.
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