Real Estate Investment: High Capital, Low Return



Mark Twine had once said, “buy land, they are not making it anymore”. Through his witty remark, Mr Twine conveyed one of the most important secrets of investment — scarcity accelerates demand. We have reached a point, at least in the urban regions, where we are facing a serious shortage of land for residential purpose. That is one of the reasons that our cities are expanding so rapidly. There are many people pouring into cities every day and there is less urban and residential infrastructure to accommodate them. This disparity in demand-supply has triggered the property rates to shoot upward in most of the big cities and the small towns have been quick to follow the suit.

As real estate sector is capable of such dramatic price movements, it has been a favourite investment avenue for ages. There is little doubt that investment in real estate if done at a fair valuation, can bring handsome returns. Having said that, if you are looking at real estate in 2018, then it will be advisable to check other investment options like equity and mutual fund which promise better returns by employing less capital.

Real Estate Investment Is Good Because:

Real Estate Is A Safe Investment - Real is a traditional investment class. It enjoys the tag of 'safe investment' like gold. While you are investing in gold, it is considered, that the value of gold will not fall beyond a point. This theory holds true in real estate, too. A look at the graph of real estate prices will show that it always trend upward. Of course, there are phases where the prices go through a certain consolidation, but slowly and steadily the prices of real estate always go higher.

Property Rent: Recurring Income - One of the greatest incentives of real estate investment is that when you buy a home or a shop you can let it on rent until the time the prices of the property reach the point where you want to sell it. The recurring income that you get as rent is like a dividend on your investment. You get the opportunity to invest this income in productive investment instruments like mutual fund through SIP. Moreover, when you let out a property on rent you also get a lump sum deposit amount (usually a rent of few months) from the tenant. As the deposit is refundable, you can invest it in stocks or fixed deposit and get additional income until the time you hold it.

Real Estate Investment Is Bad Investment Because:

Real Investment Is Highly Expensive — It goes without saying that to invest in real estate you need to have big money. Buying a shop or a house can cost approximately from Rs.8-10 lakh and the price tag can go up to any level as there is no upper cap. Furthermore, when you purchase a home in a developed neighbourhood, it will be expensive and will make the return on your investment low as the rates of that locality must have already reached the saturation point. Real estate is an expensive business unlike equity and mutual fund investment where you can start investing with as low as Rs.500. Even the old investment medium like gold is cheaper to invest in.

Real Estate Market Is Illiquid — The easy availability of buyers and sellers means liquidity of the market. The real estate market is known to be highly illiquid most of the time. This state is not because there is a lack of buying intent or ability or availability of funds but only because of the complicated nature of real estate trades.

Let me illustrate this point with an example. If you want to sell a house property you had bought as an investment, you will have to publish an ad in a newspaper on a real estate portal or you will have to hire a broker. Then interested parties come to see the property and take a long time to reply. Thereafter, there are numerous rounds of negotiations about rates. While this going on, there is always a possibility of a deal not working out at any stage. Similarly, the journey of buyers is equally tiresome. All this goes on to show that that the real estate market is highly illiquid.

Can Equity Outperform Real Estate?

Before comparing real estate with other investment instruments like equity and mutual fund, we have to understand whether returns on real estate can be any match to equity.

To illustrate this point there is a popular story of Rakesh Jhunjhunwala. It will correctly place the difference between equity and real estate.

Ace investor Rakesh Jhunjhunwala was considering the idea of buying a new home in 2005. He found a promising prospect in the posh suburb of Malabar Hill, Mumbai. The price of the home he had zeroed in on was Rs.27 Cr. To buy this home Jhunjhunwala sold some of his shares in Crisil.

Jhunjhunwala had been holding the shares of Crisil, a rating agency, for a long time. You may ask - so what's a big deal in that? He wanted to buy a home so sold his shares. The big deal happened a few years later. The stake that Jhunjhunwala sold in Crisil went on to become a multi bagger stock. The value of the stake he sold for Rs.27 Cr was approximately worth Rs.700 Cr in 2015.

In 2018, let's see where his real estate investment stands. Let's assume the property appreciated 200% (It's virtually impossible, though) which will make its value Rs.81 Cr. Still, against the blistering performance of Crisil, we can say that Jhunjhunwala lost around Rs.619 Cr. That's a big deal!

This story is a defining example of the power of equity.

Investment In Gold - Not As Glittery As It Looks


To say Indians love gold is an understatement. Indians are obsessed with gold. From checking the price of gold every day to buying gold whenever the rates drop, Indians have certain fixation towards owning gold. Owning gold in a form of jewellery is considered a matter of pride. More you have it, wealthier you will be considered. The gold jewellery, without a doubt, is an asset, but when people start looking at gold as an investment medium, they restrict the growth potential of their capital. You may ask, isn't gold a good investment? Let's say it's not the best of the investment and in sometimes, it's a flat-out bad investment.

Let's understand what investment in gold has to offer.

Before we dissect the investment potential of gold, it will serve us well to understand what investment means. Investment is an act of placing your capital in a medium that will keep the value of your money (capital) at par with the inflation rate, at least close to it.

For example, if I have Rs.500 and buy 2 shares of XYZ Company. 15 years later the share price of XYZ company is Rs.2,500. That means my Rs.500 are now worth Rs.5,000. To conclude, investing in XYZ was a wise decision. In 15 years, it has given 1000% growth.

Coming back to gold, taking a cue from the above example, you have to ask - can gold grow with time? The answer is - it certainly can. The data of last few decades shows that gold has witnessed a steady rise over the last few decades. However, the important element to understand is what factors have propelled the price of gold? The historical data shows whenever there is uncertainty in the market or if there is any prolonged geopolitical crisis, the price of gold rise. In such situations, investors lose faith in all the asset classes and repose their faith in gold as they believe its value will not fall beyond a point. This is true, but it doesn't make gold a good investment. This quality only makes gold a perfect tool for hedging.

Things That Don't Work

Gold is a commodity. Gold is not a business nor is it a legal tender. It is just a precious commodity. If you study other investment instruments like equity, debt or even forex, there is a fundamental underlying business to all these investment mediums. The day to day price movement of stock and bonds is a reflection of underlying business activities.

To understand this concept better let's take an example of equity. When you invest in a certain company's stock, your money goes to the underlying company. There onwards the working efficiency of that company defines the value of that company's stock and also the value of your investment.

However, when we look at gold, the only thing responsible to move the price of the gold is this belief that someone will give it a higher price. It doesn't have a business, it just derives its value from this belief. In a way, gold is unproductive. It doesn't contribute to the economic growth.

Therefore any investor who wants to invest in gold should take a moment and check for other alternatives at his/her disposal i.e. mutual fund, direct equity investment, etc. A primary analysis will tell you that if you invest the same amount in the above-mentioned investment options there are chances that those options would give better returns than gold. As discussed above, the reason for the price movement of gold is the fear that other asset classes i.e. equity, bond, etc. will lose their value in future.

Still Interested? Here Are Some Alternate Routes To Invest In Gold

There are many people out there who would like to invest in gold despite being well aware of its shortcomings. For such people, the good thing is that it is not required to own your gold in a physical form. Owning gold in a physical form invites risks like theft of gold. Also, one has to make provisions for the safety and security of the of gold.

Ideally, you should buy gold in physical form only when you want to make jewellery. In a situation where you want to invest in gold then you should consider options like Sovereign Gold Bond or Gold ETF and for trading in gold, you can opt for commodity trading. By choosing these options, you don't have to bother about the storage and safety of the gold as you don't get delivery of it. However, you hold full ownership of the gold you get for your invested amount. It's just like buying actual gold minus hassle of its safety.

The Sovereign Gold Bond and Gold ETF follow the Indian rate of gold. Therefore, wherever the rates of the gold rise your investment goes up and vice-versa. The important point to remember is that these are not the mediums to beat the market volatility of gold.

Forex Trading: A Global Currency Game


Trading is an exciting activity. Whether you make money or you lose it, it never fails to catch your attention. The reason it is so popular amongst people is that its potential of making big money. The professional traders often spread the stories about how they have made their fortune in trading in a short time. There are many traders who boast about their successful trades but the statistics suggest that only a handful of traders, 2% to be precise, make money in trading. The other way of interpreting this stat is that 98% of the traders lose money. That sounds scary, isn't it? In India, trading is usually done in equity, commodity and currency market. These are different asset classes. Amongst these three, Currency, better known as Forex Trading, is little different than the other two. Forex is a universal market where all the traders across the world trade.

Let's shed some light on the forex market and try to understand its potential and what traders/investors stand to gain from it.


What Is Forex Market?

The forex market is the platform where all the currencies of the world are traded. In the international trade, currencies are important. For the businesses and consumers around the world as currencies have to be exchanged in order to carry out international trades and business transactions.

Let's demonstrate this point with the help of an example. Suppose you are in India and you want to buy an iPhone from the USA. As you are buying the product from the US market, one of the parties involved in this transaction i.e either you or the merchant you are buying iPhone from has to make the payment in US dollars (Currency of the US). What it means is that the Indian importer of iPhone will have to pay the equivalent value of Rupees (INR) into US Dollars.

In the same line, if an Indian tourist is travelling in Africa, he/she would be unable to make transactions in Rupees as it is not a local currency. In order to make their travel experience hassle-free, Indian tourists will have to exchange Indian rupees for the local currency, in the case of South Africa, it would be Rand.

This transaction illustrates that two currencies were exchanged to procure a certain commodity. The above-mentioned example was about a retail transaction. There are many high volume transactions that happen between countries every day. As different currencies change hands on the day-to-day basis, the value of these currencies keeps fluctuating. This daily price movement is what triggers the trading in the Forex Market. All these points where travellers, traders, merchants feel the necessity to exchange currencies is the very driving force of the forex market. As a result, many currencies are exchanged in the international market and subsequently creates a demand-supply equation which ultimately stimulates forex trading.

Transactions like these which happen across the world at a huge volume create a demand and supply for certain currencies. As a result, the value of these currencies goes through price fluctuation.

The forex market is the biggest and the most liquid financial market in the world. The market size of the forex market makes other big asset classes like equity market and the commodity, which attract high volume every day, look smaller in comparison.


Forex Market Is A Global Market

The fundamental difference between the forex market as compared to stock and commodity market is that the forex market, being an international market, does not have a central exchange as it is Nifty, Sensex for equity and MCX for commodities.

In forex, all the traders are on a network which connects all the traders across the world on a digital platform. Due to this, there is no requirement of a centralised exchange. Also, trading is conducted electronically over-the-counter (OTC).

Another interesting thing about forex market is that it is open 24 hours a day for the five and a half days of a week. All the currencies are traded across the world. However, the main markets for forex are London, Hong Kong, Tokyo, Zurich, New York, Paris, Frankfurt, Singapore and Sydney - across all the time zones. This simply means is the time when a trading day in the U.S. ends, forex market starts again in Tokyo and Hong Kong. As it is traded across the continents all the time the forex market is able to stay highly active any time of the day, with price quotes shifting on the constant basis.



NPS: A Better Tax Saver Than A Retirement Fund Builder


Are you saving for your retirement? If you are in your mid or late 30s and your answer is 'no' then it's a high time you should start investing. Many people think they are going to retire in their late 60s so they have plenty of time to start investing. The reason, you need a longer time span for retirement planning is that you have to save a huge corpus which will come to your rescue when your fixed income (salary) stops. Therefore, you have to think of inflation which will be much higher than it is now which will considerably reduce the value of your money.

To stay above the inflation you will need plenty of time. Hence, starting early is the best way to go about your retirement planning. Amongst many investment alternatives like a mutual fund, direct equity investment there is also an option of government-supported National Pension Scheme (NPS). There are a lot of opinions about NPS, at the same time, there are many people who totally rule it out from their investment portfolio.

Let's take a look at NPS, its features, advantages and drawbacks.

What is NPS?

National Pension System is the most famous Government supported pension scheme which is open to all the Indian citizens between the age group of 18-60. Launched in 2004 by Pension Fund Regulatory and Development Authority (PFRDA). NPS was initially only for the government employees, however, in the year 2009, after revising the rules of the scheme the scheme was opened for all the citizens of India.

The minimum annual contribution for this scheme is Rs.1,000. In the earlier stages of the scheme, the minimum contribution was Rs.6,000. NPS allows you to invest on a regular basis in a pension account during the period your employment. At the time you retire, you can liquidate a part of the amount that you have saved over the years while the remaining portion goes into buying an annuity scheme through which you get a lifelong pension.

Is It Good For Retirement Investment?

NPS is an investment medium created especially for retirement investment. However, on this counts, NPS fails miserably. To create a good retirement corpus you can't rely on any instrument that does not give 100% equity exposure. Equity investment is the critical element of the long-term investment.

NPS does offer equity option in the asset class E, but it only allows 50% exposure and the rest of your fund is invested in debt funds. Besides, there are stringent restrictions on withdrawal in the tier-1 account which limits investors' option to withdraw either amount at the end of the term and invest it in other better options which can give better returns like a mutual fund. Moreover, it's not any nominal amount but 60% of your corpus which you never get back.

In case investors get the entire amount in full they can invest it in better mediums i.e. mutual funds which will give them far higher returns compared to what the annuity scheme may give. Moreover, the biggest problem of the annuity is that it is wholly taxable. These are some of the points which make NPS an investment option which is not good enough to meet the retirement goals.

NPS: An Efficient Tax Planning Tool

Though NPS is not a good retirement investment alternative, the thing which makes special is its tax-saving ability. NPS allows not one but two tax deductions under 2 sections - Rs.1,50,000 under Section 80C and Rs.50,000 under section 80CCD. 

However, you need to plan your tax intelligently to make full use of it. To save tax section 80C go for tax-saving alternatives that not just save tax but also give better returns. ELSS is a fine example of that. In ELSS, you get a short locking period is of 3 years which is the shortest in any tax-saving medium. On top of that, your funds are invested in equity which increases the possibility of getting better returns than PPF and NPS. Therefore for deductions under Section 80C, you can choose a smart option like ELSS while for Section 80CCD, you can invest in NPS. The duel tax advantage is the biggest bonus of NPS, however, that's the only benefit of National Pension Scheme.

Equity OR Mutual Fund - A Tussle Of Risk & Safety


Mutual Fund Investment

Equity investment (stock market) has been one of the most rewarding investment instruments. However, it is the most unpopular investment medium as far as retail investors are concerned. Your first reaction would be - because it's so risky. It is true, direct equity investment is extremely risky. That is one of the reasons why most of the investors who want to invest in equity usually take the mutual fund route. That's a smart thing to do. The nature of the stock investment is so complex that mostly it ends up confusing investors while mutual fund investment is simple and hassle-free. But it's also a fact that if you do your stock investment right it can outshine mutual fund or any other investment medium for that matter, by a huge margin.

Let's first try to understand why people invest in mutual funds instead of stocks.

There are numerous reasons why investors take a safer path to wealth creation, one of the principal reasons is that majority of the people have several misconceptions about equity investment. There is a popular belief amongst investors who are not familiar with the facts of the stock market that it is a place for gamblers and fixers and putting money there is as good as kissing it goodbye. To some extent, this apprehension is true. We can't completely rule out the possibility that money evaporates in the share market. Future & Options (F&O) trading is more than capable of eating up your money without a trace. Opposite to that, in mutual funds, the money is under the supervision of highly qualified fund managers who work on a well thought out investment plan.

It will be safe to assume that the fear of losing money is the main reason that holds many investors back from investing in equity. The good news is that there are ways to reduce risk and make it as safe as the mutual fund.

Why Should You Invest In Stocks?

The mutual fund investment is considered safe, nevertheless, when compared to returns of direct equity investment, mutual fund or any other investment instrument is no match to direct stock investment. In the year 2017 alone, Nifty & Sensex gave average 30% returns. This is just the average of 50  bluechip stocks. Nifty midcaps performed even better. They enjoyed a golden run as many of the mid and small cap stocks delivered as good as 300% returns in the period of 1 year.

As midcaps performed well even mutual funds in the midcap equity segment have performed well but even the best performing funds haven't managed to give more than 35% returns. It simply means that direct equity is a far more rewarding than mutual funds.

Now that we have understood the pros and cons of both the sides let's try to understand the ideal way of going about your equity investment.

So Where Should Your Money be - Mutual Fund Or Stocks?

It's a no-brainer - it's EQUITY! As we have learnt that event the best equity fund of last year didn't give more than 35% returns, on the other hand, some stocks have given as high as 1200% returns. There is no competition between these two whatsoever.

Stock investment has the potential to bring you unimaginable wealth. People choose mutual fund over equity to avoid the complexities of the stock market. In that way, a mutual fund is an easy and hassle-free route which doesn't require you to keep track of the performance on every day. In equity, you have to find stocks with good fundamentals and have to keep track of their performance from time to time.

It's difficult for a person from a non-financial background, to understand the nitty gritty of the stock investment. For such investors, who want to be a part of the equity but lack knowledge and experience an stock research firm becomes the best options. A good research firm gives stock calls with precise entry and exit points and makes stock investment as easy as mutual fund.

Source: Mutual Fund Investment

How Bonus Shares & Dividends Can Multiply Your Wealth


The common mistake that people commit while looking at the stock investment is that they think they can only make money by buying and selling of the stocks. On the face of it, it sounds perfect - buy cheap and sell when the price is high. But there is also a facet of stock investment which can make you plenty of money provided you have a long-term investment perspective. The incentives of having a long-term view are dividends, bonus shares and rights issue. It's true they come at a slow and leisurely pace but wealth creation is a process which takes time. Like intraday trading, you don't see the results in a day's time.

But before we get into how bonus and split shares can add value to your portfolio let's first understand what these phenomena and why companies undertake them.


What Is Bonus Share?

Bonus shares are the extra shares granted to the current shareholders. A ratio and record date is determined by the company and all the investors who own the company's shares on that day qualify to get the bonus shares. Bonus shares, as the name suggests, is a bonus, a reward to the investors from the company. However, there is also a concealed motive of the company behind it. By giving bonus shares the number of fully paid up, outstanding shares increases at the same time the value of the share is adjusted (decreased). As a result,  company's stock, with the updated price, becomes attractive to new retail investors. It would be safe to say that bonus share is a win-win situation for the companies as well as for the investors. Remember, in the event of the bonus shares, the face value of the share does not change.

Long-term investors love bonus shares. Not only it increases the stock holding of a particular stock but also gives a chance to the investor to get more upside in the stock. When a company announces bonus shares they announce it in a certain ratio. Once all the formalities are done, the price of the share is adjusted. As a result, when the bonus shares are credited to your account, the average price of the shareholding comes down and there is always a possibility (for good companies) for the share price to go higher in the future. It simply means the stock will bring you wealth.


What Is Split Share?

Splitting shares is an option a company can use if it feels the price of the company's stock has become too big and it no longer looks attractive to the investors. Also, splitting the stock is a safe way to regulate the price without hampering the market capitalisation and the interest of the existing shareholders. All the big companies split their shares on regular basis. Just like in bonus share, the splitting is done with a certain ratio e.g. 1:1 or 3:1. However, unlike bonus shares, when the stock is split, the face value of the share changes.


What Is Rights Issue?

The rights issue is the process by which a company raises further capital. The thing which makes Rights Issue different is that the rights issue is only available to the existing shareholders of the company. For example, if X holds 100 shares of Y company and the Y company rolls out a rights issue with the ratio of 5:1 (For every 5 shares you can apply for 1 share). In this case, X has 100 shares so he/she can apply for 10 shares.

Now you must be thinking why X would apply for the shares in the rights issue when he/she can easily get the shares from the open market? The reason is discount! Yes, in a rights issue the shares are offered at a discounted price.

A Cautionary Note: Like bonus and split shares the announcement of the rights issue is not always received by the investors with a great enthusiasm. The reason being - the rights issue is rolled out in the situation where the company needs additional funds as it doesn't have enough cash to keep the operations going. This shows the company is not handling its cash efficiently thus it casts a shadow of a doubt over the management of the company.

However, if the company is being managed by a good promoter he can get the company back on its feet in no time. Therefore rights issue can also be a golden opportunity to buy shares at discount and bring down the average price.


Good Things Come To Those Who Wait!

You can look at Infosys as the prime example of how a company can make a fortune for its long-term investors. The generous dividend payouts and periodical bonus shares have played a vital role in it. Infosys got listed in 1993 and till date, it has given bonus shares 6 times in different ratios. Those how have been holding the shares of the company through all these events have built a handsome corpus over the years.

IPOs: More Fancy Than Facts


Initial Public Offering (IPO) is often looked at as a guaranteed money-making scheme. Every time a new offer comes out investors rush to grab a piece of the pie. It's true the hype created by the promoters, investment bankers and the brokers do help the stock to get considerable listing gains. Sometimes some companies get good listing value despite poor financials. But if we have to look beyond listing gains do IPOs give good long-term returns? It depends entirely on the financial standing of the company and how it figures in the peer group. Every new stock comes with a different story, a good company with solid fundamentals will perform well while bad companies will sooner or later come back to the price they deserve.


As a smart investor, it is important to look beyond the tall claims of the promoters and only apply for the IPOs which have good future prospects.


Most Of The IPOs Are Unreasonably Overpriced


People often think that an IPO is a golden opportunity to get stocks at cheaper prices. This might be true about some companies but the truth is that the most of the IPOs are unreasonably overpriced when they are offered. One of the reasons for bringing out an IPO is that investors of the company like venture capital firms who had invested in the initial rounds of funding the business get a chance to cash out some portion of their invested capital. Launching an IPO is a long process. There are several stakeholders involved in it like promoters, investment bankers and brokerage firms. They do their best to build a hype around their company. As a smart investor, you shouldn't buy their usual sales pitch of the IPO being "cheap and attractive". Remember, their interest lies in getting the IPO price that the promoter wants and then justifying the unreasonable price.


Most Of The IPOs Don't Deliver What They Promise


Always remember that the investment bankers and underwriters of IPO are just salesmen and the only objective of a salesman is to sell with total disregard for the value it brings to the customer/investors. Once you acknowledge this fact you will look at the entire process rationally.


Coming to the part of how an IPO fares post listing, the reason the whole IPO process is deliberately hyped up is to get as much attention of the investors as possible. As the IPO happens just once in each company they try to get utmost mileage out the promotional drive. Now imagine, if the company only on the basis of the hype is listed way above its intrinsic value it is bound to come down sooner or later.


Again, it's incumbent upon investor to ensure that IPO he/she is applying for hold bright future prospects. To understand the facts you have to study the IPO offer beyond its fancy claims. To put it simply, you need to get past the bright and glossy stuff and assess the offer on the basis of its fundamentals. many times investors fall prey to the herd mentality where they do a certain thing just because too many people around them are doing it. Therefore, concentrate on fundamentals of the offer.


Just Good For Post Listing; No Long-term View


The greatest attraction of any IPO is that it gives instant upside at the time of listing. It is true, even the most overvalued IPOs on most occasions succeed to fetch a higher list price. People who are looking for instant short-term gains in the period of few weeks or months often get that. However, investors who have a long-term investment vision for their investment are often disappointed by the performances of most of the IPOs. Most of IPOs underperform because they started off with high valuations which their business did not justify in the secondary market.