Real estate for residential purposes is efficient
The reason we are putting this down as a separate point is that most people confuse their residential real estate as part of their investment portfolio. While it is an asset class, it is not an investment in the strict sense of the term. You are in it for the comfort and security of your family not to multiply your money. To that extent, residential property will continue to be your building block. It has a variety of advantages. There is no pressure on you to sell the asset in the short term, and hence, they normally tend to create value over the long term. Secondly, they are efficient from a tax perspective. If you take a home loan, you get the benefit of Section 24 on interest paid and Section 80C on the principal component. That makes it efficient in post-tax terms. If you sell your property and reinvest in another property you don’t pay capital gains tax. That surely makes it worthwhile as a building block.
Realty investments can be better done through REITs
- In case you are looking at real estate as an investment, you must consider REITs as a viable investment option. There are quite a few benefits in holding real estate via REITs.
- You can get exposure to commercial real estate like offices, malls and SEZs since REITs are only permitted on commercial property in India. It is this segment of realty that has seen tremendous growth in the last few years.
- It is a useful diversification to your portfolio. You end up holding a portfolio of diversified realty properties and that reduces your risk. Also, REITs tend to have low correlation with equities and mutual funds and thus reduce overall risk in your portfolio.
- REITs can also be tax efficient. The SEBI regulations stipulate that 90% of all income earned by the REIT has to be distributed. When the REIT distributes dividends, it is tax-free in the hands of the investor as it is a pass-through payment. That is an advantage.
Mutual funds and realty are more about allocation and not about competition
Mutual funds as an asset class will continue to drive your journey towards your long term goals. It is a lot simpler. You just put a value to your goal and then design a SIP to reach that goal. Of course, the SIP will depend on your asset allocation. Here again, you have readymade mutual fund plans for meeting the 3 primary needs of growth, regular income and liquidity. Then how does realty fit into the equation?
First and foremost, you need to keep your primary residential property out of your investment plan. That is more of a family security that you invest in. Other than that, your long term plan should look at alternate asset classes like gold and real estate with an overall allocation of 15-20%. Ideally, it is not advisable to cross this periphery as it will impact your other long term goals. This real estate allocation can be approached through REITs or InvITs as the case may be!