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The Game of Returns - Real Estate vs Stock Market investment in India

By Admin
22 June 2022, 5:14 PM
real estate vs stock market investment India

Real Estate and stocks are arguably the most popular investment avenues in India. Most people invest their money in either of these in the hopes of getting high returns. Even though they are quite different in various aspects, they do have one major factor in common - market volatility can have a huge impact on both. This was experienced around the world recently when the Coronavirus pandemic led to adverse effects across all markets.

Nonetheless, both of them do provide high returns if you stay invested for a long time. Through this article, we give you a detailed analysis of how returns work in both these investment securities.

Features of Real Estate Returns

  • In most cases, it cannot beat inflation.
  • It is hard to estimate the returns of real estate but it primarily depends on the location of the property and market fluctuations.
  • You cannot consider the house you are living in as a real estate investment as it is not giving you monetary returns.
  • To make investments, you need a substantial lump sum amount.

Factors affecting the returns on real estate investments

  • Location of the property – The location of the property is one of the key determinants of how your investment performs in the long run. If you have a property at a prime location, then you can expect higher returns after a certain period of time.
  • Economy – The economy of the country plays a huge role in the real estate market. No investor, especially a foreign one, would like to invest in a country that is economically unstable. A country with a good GDP that offers financial stability and job security to its people has a better performing real estate market than others.
  • Government policies – Government policies can make or break the real estate market. If the government comes up with policies that encourage people to invest in real estate, the market will automatically boom, thus giving you higher returns. Moreover, no foreign investors will invest in countries that have strict government policies when it comes to buying land or properties.
  • Interest rates and property taxes - The interest rates on loan and tax relaxations have a big say in determining how the market performs. If they are not favourable to buyers, fewer people will invest and the market will start going down.
  • External investors – Any country that is investor-friendly will automatically see a surge of investors from across the world. This can transform the real estate market completely, as they bring in new technologies, machinery, equipment and employment to the market. All this requires the use of land, which makes these external investors invest heavily in real estate. Naturally, it will have a positive impact on the returns as well.

Features of Stock Market Returns

  • Investing in stocks makes you a part-owner of the company, which means if the company performs well, you will be able to enjoy good returns.
  • You are eligible for dividends on shares.
  • You can sell the shares at the right time to enjoy healthy returns.

Factors affecting the returns on stock market investments

  • Government policies – Just like with real estate, government policies can affect the returns on stock market investments as well. For example, if the government decides to increase corporate taxes, the profits of companies will take a hit and thus the market can plunge. Changes in Foriegn Direct Investment (FDI) policies can also impact the market.
  • Regulatory policies – Regulatory announcements from SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India) often have an impact on the stock market. Regulations in repo rates or trading rules can have both negative and positive impact, thus affecting the returns as well.
  • Strength of the currency – The performance of the currency has a huge say in determining the stock values. For example, if the rupee is not performing well in comparison with the dollar, then investors from around the world will take note of this and may even pull out if they feel it is unsafe to stay invested. As a result, the stock market experiences multiple disruptions, which can impact your returns. However, if the currency starts performing well, then the stock market sees a positive high.
  • Economic indicators – A healthy GDP value of the country can always have a positive impact on the stocks. The price of oil in the country is another economic indicator that plays a significant role in determining the performance of the stock. This is truer for countries that depend on imported oil, as stock markets in such countries take a bigger hit if the oil prices surge.
  • Natural disasters – A natural disaster can disrupt the economy as it hampers the ability of companies and people to work at the highest level. With people not having a lot of money to spend, the stock market automatically takes a hit.
  • Political factors – Elections, government interventions, and budget announcements are some of the top political factors that can have a huge impact on the stock market. A budget strategy that favours a particular industry will naturally see a rise in stock values related to that.

Difference Between Real Estate and Stock Market

Here is a small table showing the differences between the two for you to get a clear understanding of how they perform.

Parameters

Real Estate

Stocks

Term of Investment

If you are to enjoy good returns, then you need to stay invested in real estate for a long time. You will have to wait for the market to reach the right stage to get the ideal value for your invested property.

It is again a long-term investment but the tenure is not that long when compared to real estate. You should be able to enjoy good returns in 5-7 years for an asset that has been performing well.

Ease of Investment

There is a lot of research and paperwork before you can finally make the deal. At times, it might take you months to get everything sorted.

It is quite easy to invest in stocks, as you just need to find the right stock broker and link your bank account to your trading account. You do not even have to get out of your house for this, as you can do all this online.

Market conditions

Market volatility can hit real estate but not as much as it hits the stocks. Therefore, holding onto your investment will give you higher returns once the market has stabilised.

Market volatility can have a big impact on stocks, sometimes even in a matter of minutes. Such fluctuations in the stock prices lead many investors to buy and sell stocks regularly, thus undermining their market value. However, if you stay invested for a long period of time, you’ll find that eventually most stocks associated with big companies perform well again. As a result, you should be able to enjoy higher returns than those offered by real estate.

Liquidity

You always have to wait for the market prices to suit your expectations so that you can liquidate your real estate investments.

It offers high liquidity, as you can exit your investments whenever you want. Furthermore, you can partially liquidate your equity assets to make ends meet when required.

Diversification

No real option for diversification.

You can easily diversify your investments with stocks by choosing different companies and industries to invest in.

Tax Implications

Property tax is applicable on residential and commercial properties. The tax you need to pay will depend on the location of the property. Additionally, if you sell your property, you must pay capital gains tax (which will be taxed at 20.8% of the value of the sale)

Capital gains tax can vary based on long-term and short-term investments. You can be taxed 10% of the earnings on long-term investments, and 15% on the earnings of short-term investments. 

Since market fluctuations have an impact on returns related to both real estate and stock market, it is important to keep your risk appetite at the forefront while selecting between the two. Note that you need a big capital investment to invest in real estate, which is not the case with stocks. However, real estate is slightly more stable than stocks, but can also be inferior in terms of returns.

Find out how real estate compares with other investments such as gold and SIPs!