Home / Opinion / Gold or land or equity? It is not ‘or’, it is ‘and’

Ask any group of people what gives the highest return and nine out of 10 will say: real estate. The 10th will name gold as the next best investment. Mention stocks or equity and the response is either hostile due to the stock market related scams (including the unpunished scam of unit-linked insurance plans) or fearful. Every time I’ve spoken to a group, I get the same response: a sure-thing with real estate and gold, and an overall feeling of mistrust with equity. Let’s unpack this a bit. Let’s look at return rates. I will do this in two parts. One, historical returns. If we begin with the Sensex at 100 in 1979 as a starting point for a meaningful comparison and look at returns across the market, real estate and gold, we get a positive return for all three. Investment in gold from 1980 to 2014 (I got gold prices in Indian rupees off gold.org) returned 11%. Investment in the Sensex returned 17% over the same period. Tracking real estate is tougher due to lack of data series and due to location issues. So I picked the village where buffaloes bathed turned boomtown of Gurgaon to see what the price change has been. Speaking to original inhabitants from the 1980s of what is now DLF City, I get rough rates of 2 lakh investment turning into 2 crore over 34 years, or an average annual rate of growth of 15%. Just to put it in context, I looked at Reserve Bank of India data and got an average annual return of 9% on a five-year fixed deposit (FD) across the same time period.

Two, now let’s look at slice-of-time returns because this broad sweep data hides individual stories of an investor buying an Infosys and another buying Satyam. It hides the stories of an investor buying in Gurgaon and another in Faridabad. The broad sweep data will not talk to anybody who was in the market to buy a flat between 2003 and 2008 and lived through one of the biggest price re-ratings of urban housing in India. I remember I was, and the price of the flat that cost 30 lakh in the beginning of 2003 kept rising every few weeks. Finally, it settled at about 2 crore by end-2008—a breathtaking 46% compounded annual growth rate over five years. And there was a year in which prices doubled in Delhi real estate. But this is exactly the same as timing the equity market. Those who bought real estate between 2003 and 2006 got lucky (and it really wasn’t that they knew that Alan Greenspan was keeping rates low and flooding the world with cheap money!). As did equity investors over that period. Sensex returns over 2003 to 2008 stand at 38%. Again there was a year from mid-2009 to 2010 when the market doubled! Both real estate and the Sensex returned 20% a year from 2003 to 2014.

Remember these numbers do not take into account transaction costs, taxes, cost of maintenance of the investment or inflation. Gold returns, for example, are overstated since most people buy jewellery and much of the return goes to the jeweller through commissions.

Fixed deposit returns turn negative due to taxes and inflation. The only two assets to give a positive post-tax and -inflation are real estate and equity. But build in costs like the stamp duty and registration, and the cost of fixing the house for a tenant, and the returns from real estate begin to look less attractive. I’m not even building in the cost of the soul crushing experience of buying real estate is in India—right from the ride that property agents take you on to the black money-lined road to real estate.

So as I make the case for equity, investors need to remember that if they gave the same respect of looking at returns over time to equity that they give to real estate, it would be a smoother ride with fewer costs.

Of course, equity investing means that you need to follow the rules. And rule No.1 is this: if you want to punt, go to the casino. Getting an equity exposure is about following the rules of holding a portfolio that gives you index-plus returns and not about betting the kitchen sink on a hot tip. If you do that, don’t cry later.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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