Both property and equities work over the long term.
Intuitive thinking need not always be right. Counter-intuitive thinking can also be right… sometimes so very right that you wonder if that wasn’t the intuitive thing to do. Take Steve Jobs. Instead of launching mobile phone models that cater to every group, he launched one phone - the iPhone - for everyone. Apple is world No 3 in Smart phones today.
A lots of conventional thinking is flawed. But we continue thinking that way, since it is a “comfort zone” for us. Moreover, everyone around us, our family and peer group also endorses it. The same applies to the way we handle our personal finances too. We continue to labour under the many myths and misconceptions, which have become accepted mainline tenets today.
Often, when we face a financial shortage, we wish for higher paying jobs. Conventional thinking says that if one changes one’s job for a better paying one, financial issues should be sorted out. However most fail to realise, more often than not, it is the wrong handling of current finances that leads to financial shortages. Even if the new job assures better inflows, aspirational thinking will lead to spending more money for a better lifestyle. There will be always be new and better avenues for outflows as long as the the basic problem of handling money in a prudent manner is not addressed.
CLARITY ON PROPERTY
Another advice that elders in the family dispense to the young is - one should buy property now since property prices will always be rising. Best to buy it now than later, they say.
Long-term growth of property is between six and 10 per cent, depending on which city the property is located. Expectations have risen as people look at the returns on property in the past six years. Some yearssaw property prices rising by 20-30 per cent yearly. But that is not sustainable. In equity or equity mutual funds (MFs), too, the returns were in excess of 50 per cent in some years. But it cannot always grow like that. The long-term average will catch up.
So, it is a myth that property will become unaffordable in future. As long as you are investing your surpluses and earning over eight per cent yearly, you will be able to save adequately to meet any escalation in future. This way, one will be keeping the options open and at the same time, can buy a home at a location of choice, in the future.
Again, property investments are seen as long-term investments and equity-oriented investments are looked at as short-term investments. The fact is that both are good investment avenues. Which asset class to invest and in what mix depends on an individual’s personal requirements. Equities, over a period of time, have given very good long-term returns.
The Sensex has given a compounded return of 18 per cent annually in 31 years. There is no reason to think equity is not a good long-term instrument. In fact, there is no other investment instrument which can beat these returns. Property investments are favoured due to their higher emotional appeal and the fact that it is a tangible asset. You can walk into your home or see the land. Equity holdings today are not even physical paper, which you can hold; they are entries in your demat account. Hence, psychologically, equities do not hold the sway that property does. Also, due to the fact that equity shares can be bought and sold very easily, it does get bought and sold - sometimes several times within a day. That does not mean it is the rightthing to do.
There are long-term equity investors who have built fabled corpus for their retirement from fairly modest beginnings.
THE ARITHMETIC
The other well-rooted belief is that one should buy property to save taxes. Let us get this straight. Saving taxes is not an objective by itself. Getting good after-tax returns, meeting goals and having the cash flows to meet one’s requirements over time are the more important and relevant concerns. Yet, so many buy property to save taxes.
How much can one save? In the highest tax slab, the savings for a residential home on Rs 1.5 lakh of interest payment is Rs 46,350 per annum. Note that your interest outgo may be much higher, but your benefit will be restricted to this amount only. While saving this amount is fine, one takes on a long-term liability. Even rent is tax-deductible.
A rented house, though inconvenient in some ways, is not a liability if one wants to shift to another city. Many people still say they would prefer to pay an equated monthly instalment (EMI) and create an asset instead of paying a rent to someone else. The problem with this is that the EMI will be many times higher than the rent and will have to be sustained even if one moves out of that city.
We accept what we hear as gospel truth. It makes sense to validate that against the touchstone of your wisdom, before accepting and acting on it. Who knows, you may break some rules and come out smelling of roses, like Steve Jobs!
The writer is a certified financial planner
