Pause before buying 2nd house- how about MFs?

Currency

I live in Mumbai. I bought a house in Chembur in 2009 for the very first time in a residential apartment complex. My husband and I live in the house and thankfully we don’t have any other real estate investments.

Thankfully I say? What do I mean? Recently, we residents got together and decided it was high time that we should form a Housing Society which we did inspite of non-cooperation from the builder. Since then I was involved actively as a volunteer in the housing society affairs and it has been a revelation.

So here are the top reasons why you may consider investing your hard earned money into mutual funds instead of purchasing a second or third residential property as investment. 

  • Over the past few decades, real estate saw a big boom in most urban cities in India but the year-on-year sharp increase in prices has also led to the absolute value of property going up. This should lead to slowdown in future growth as affordability decreases and investors reduce their number of purchases. 
  • When buying the house have you examined the building structure? If it’s a relatively new building have you checked the quality of construction, the quality of important machinery like lifts and power backup, when painting was done, whether fire equipment are in place for an eventuality like fire, whether the building has good water supply, its own borewell etc?

If an old construction then have you checked whether a housing society is in place, whether there is any dispute between the housing society and the builder. Has there been any unauthorised construction by other residents which can weaken the building structure and impact your flat as well? 

  • A residential property is an illiquid asset where you may not get a good value in reasonable quick time even if you have taken a decision to sell at the right time. Unlike a financial asset like a mutual fund which can be redeemed any day and money would come to your bank in few days, real estate assets take months to be sold. There can be further complications if for some reason you have dispute with the housing society and the society decides to not give NOC (No Objection Certificate) until such time that it’s resolved, and this therefore can further delay sale. If the society is not formed, then the builder may charge very high transfer fees for giving NoC when you wish to sell a flat. As opposed to a housing society, which may charge NOC fees in the range of Rs 25,000 to Rs 50,000, the builder can charge a substantially higher amount.
  • Further when you need some money, you have to sell the entire property even if you don’t need the full corpus unlike investments in MFs which can be redeemed partially based on requirement only. 
  • part from the capital appreciation that a residential property is expected to accrue over a period of time one of the common reasons for buying a second flat is for regular cash flows in terms of the rental value it can fetch. We also call this the Gross rental yield. However, what would be pertinent to look at is the Net Rental Yield (net of expenses to maintain the property). The expenses would primarily be monthly maintenance costs, annual property tax payment and other repair and upkeep costs needed to maintain the apartment in good condition. There is also significant time and energy spent in supervising tenants, handling paperwork related to rental agreements (registration is required to be done), interacting with the housing society in terms of attending meetings and keeping an active track of the affairs of the society (adds to the burden given that you are staying elsewhere and not in the society itself). 

One can alternatively consider investing in the dividend option or SWP (Systematic Withdrawal Plan) facility of a mutual fund which can meet your requirement for regular cash flows. 

It is also pertinent to note that mutual funds invest investors’ money in equity and debt markets and such investments are not free from various market related risks. 

Some of the benefits that mutual funds offer:

  • Mutual Fund schemes are managed by professional fund managers who are subject matter experts 
  • One can avoid concentration risk since your investment in a MF scheme provides exposure to larger number of securities in the scheme’s portfolio  
  • Multiple schemes offered by fund houses enable switching money from one to the other to ensure that money remains invested in that scheme which is most suitable to the current market conditions
  • Transparency and ease of computing value of my portfolio since the NAVs are declared and available in public domain on a daily basis
  • Ease of liquidity (no lock in / minimum tenor)

Considering the pros and cons, though risks do exist in investing in a real estate as well as in mutual funds, in my view, as an investor you may consider investing in MFs over that second house purchase.

(The writer is Head – Fixed Income at Principal Mutual Fund)

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Pause before buying 2nd house- how about MFs?

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