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Real estate vs. stock market: Where to invest?

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Holders of spare cash or extra income are often confused about which segment to pick for investing - real estate or stock markets - both of which have their own merits and demerits.

Current economic environment in India is such that it is a difficult choice to make. Real estate is in a bad shape and inventories are piling up. Even though the rates are more or less unchanged, the real demand is sidelined.

Genuine buyers are waiting for the prices to fall a bit so that they are able to afford the house while investors are waiting hoping that the prices would come down before they chip in for investment. Real returns depend on at what point you enter the markets. Stagnant prices are discouraging both the buyer and the investor.

The performance of most stocks is lacklustre in case of equities. Even if you consider benchmark indices like the Nifty, they have been going down the barrel on an uncertain political environment. Stockists remain confused on which way the markets will go in the coming weeks.

Taking both the areas into consideration and given that you have to pick one option here, few facts need to be considered:

Principal amount

The corpus of funds is different from that of stocks. A person who is investing for the purpose of creating wealth with a particular set of return and time in mind should be clear on such aspects. In stocks, investment can be increased and decreased as per the whims and fancies of an individual but this kind of flexibility is not available in real estate.

You might be attracted towards a ready-to-move 2 BHK flat worth Rs 45 lakhs and you think that the location and approach to the property will fetch you somewhere close to Rs 60 lakhs in a year's time. But remember, for this, the required sum of investment is Rs 45 lakhs. Things are different in case of under-construction flats. They cost much less and also the returns are higher if you hold for long.

In case of equities, your corpus of funds can be changed as per your wish. You won't have to invest amounts like Rs 40 lakh if you don't want to. Investment can be made according to one's personal capacity.

Timing

Investment in a slowdown is a bit tricky and is not the same as investing in the boom period. In a slowdown, you might have invested in realty and you want cash flows for personal needs or working capital improvement in business, but you might not be able to sell the property right away due to absence of buyers at your desired price. In such cases, the investor has to sell the property at a discount or has to wait until more buyer approach.

Consider a scenario where you decided to take a home loan for a property. Delay in construction or regulatory crisis - something that has been seen in Greater Noida, UP in recent times - can give a setback to the entire idea of the investment. EMIs will continue to be charged unlike in equity investments which can be shunted down.

In stocks, if you are aware of stop losses and are risk averse, you can liquidate your position any time. Your portfolio can bring funds on a T+2 basis (trading day plus 2 working days) and the lead time is generally less.

Transparency

Nobody can doubt the transparency in segments like stock markets, bonds, and mutual funds. The profitability of investment in these sectors can be anticipated by studying past performances, recommendations and also based on personal experiences.

The company can be reviewed on the basis of the dividend paid, cash flows, ratios and profits.

In the case of properties, the transparency is a major issue. The whole bunch involved in the sector is looking for profits and regulatory authority is missing. In such scenario, cases of cheating, fraud, concealment of facts and deceiving is rather common.

Conclusion

If you have a large cash backing and have an idea of investing in properties, go for it for better and handsome returns. But, in case of a slowdown, do remember that your investment will take time to get reimbursed. Stocks are preferable in case you want instant liquidity or when you want to control your investment.

Investors often prefer equities over real estate. In real estate market, the component of black money is higher and also the demand for it, which is why transparency in such transactions is lower. Therefore, it is very difficult to find a genuine dealer or party.

InvestmentYogi.com is a leading personal finance portal.

Disclaimer: All information in this article has been provided by InvestmentYogi.com and NDTV Profit is not responsible for the accuracy and completeness of the same.

Story first published on: May 22, 2013 20:35 (IST)

Tags: Real estate, Stock markets, InvestmentYogi.com

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