Stocks and real estate are the two most popular asset classes for long-term investments since they both assist in creating long-term returns to become financially prosperous. Although there are significant differences between these asset classes, it's important to remember that real estate can be an excellent alternative to stocks due to its lower risk, higher returns, and a reasonable level of diversification. However, stocks have been shown to outperform more traditional investments like bank fixed deposits while also providing enough liquidity to buy and sell shares at any time, something that real estate investments do not.
An Overview in Real Estate vs Equity
Your financial status, risk tolerance, and investment goals all influence your decision to invest in various asset types. Let's instead have a quick discussion of the two asset types.
Meaning: Investing in real estate is buying, renting, and selling land or constructed housing units to generate wealth through consistent price appreciation when the property's value rises and rent collection, which can offer a regular stream of income. Additionally, investing in stocks entails buying and selling shares of companies, which entails earning returns and additional perks like dividends, bonus shares, stock splits, buybacks, and capital gains.
Risk: Investments in stocks and real estate are both influenced by market and economic conditions. However, there are concerns associated with real estate investments, including a lack of liquidity, the market's unpredictability, location and unforeseen property health. However, stock market investments also have price fluctuation, global cues, economic and market situations, interest rate risk, and inflation. In the stock market, short-term trading entails higher volatility than long-term investments.
Liquidity: Stock market investments have better liquidity than other investments since buying or selling shares at any moment is simple, regardless of the market situation. Technical analysis of the stock's chart pattern or fundamental analysis of the company's earnings can be used to buy or sell stocks. Technical chart patterns may be used to trade on a short-term or intraday basis, but fundamental analysis provides the company's long-term perspective. Contrarily, real estate assets are less liquid; as a result, it is more difficult to convert them into cash when selling a home or piece of land since a suitable buyer must be found, and registration and market value must be verified, among other things.
Cost: One must consider all expenses spent while possessing a property, including brokerage, stamp duty and registration fees, interest paid on money borrowed, maintenance and repair expenses, and municipal taxes, when determining return on investment or actual return. In contrast, no fees are associated with investing in the stock market. Thus all that is necessary is a demat account and a low initial deposit, which may be as little as Rs 10.
Taxation: You will be required to pay capital gain tax on the profit made after taking inflation and the indexed acquisition cost into account when you decide to sell your property. These gains can be categorised as either short-term or long-term gains. It is considered a short-term capital gain if you sell your land, house, or other property within 36 months (3 years) of buying it, and the amount of tax payable will depend on your income tax bracket. However, if you sell it after three years, it will be regarded as a long-term capital gain and taxed at 20%, plus a 3% cess with the added indexation benefit. Suppose listed equity shares are held for less than 12 months at the selling time. In that case, the gains are short-term capital gains (STCG) and are taxed at 15%, while capital gains from equity shares held for more than 12 months are subject to long-term capital gains (LTCG), which are taxed at 10% after an exemption of up to Rs. 1 lakh on all long-term capital gains in a fiscal year.
Here is where we will discuss the returns of the two asset types mentioned above. When invested over the long term, stocks and real estate are both known to yield acceptable returns. The returns over the past ten years have ranged from 370%, 100%, 140%, 320%, and 180% if we compare the stock prices of top real estate developers. However, according to the data of Magicbricks, the Residential Real Estate Prices in Gurgaon have risen from Rs 8000 to Rs 9150 per sq ft, the price in Mumbai has risen from Rs 3800 to Rs 7000 per sq ft, the price in Bangalore has risen from Rs 2630 to Rs 4750 per sq ft, and price in Chennai risen from Rs 7850 to Rs 10,950, the residential demand in Pune climbed by 9.5%. 91% of Pune homebuyers looked for multistory residences. 2BHK flats had the most demand (46%), followed by 3BHK and above units (40%)., representing a surge of 14%, 84%, 80% and 39%, respectively. These variations show how investments in real estate and the stock market performed in terms of returns over the past ten years, so one cannot anticipate exact returns from these asset classes over the long term. However, historically, real estate and stock market investments have been shown to have outperformed conventional investments like bank fixed deposits in terms of returns.
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