Better to invest in shares, property or gold
Many young people yearn to have their own house or flat as soon as they start earning, and take loans to buy a house. The problem with such a decision is that they will have to pay monthly payments of EMI (equated monthly instalments).
We will discuss the question of what is better: invest in property or shares in India?
Let us assume one buys a house taking a bank loan. Let calculate the monthly interest on the loan amount to compare it with the monthly rent for a similar house. Usually, it will surprise you to know that the rent will be quite a bit less than the interest on the bank loan.
Let us work this out by an example. Say the apartment or house costs ₨ 50-lakhs (Rupees 5 Million) and you take a loan of ₨ 40 lakhs. The average interest rate for housing loans in India now is about 10%. So the annual interest cost of the loan will be ₨ 4 lakhs per year, which works out to about ₨ 33,000- per month. You can sure find a similar or a much better flat or house for rent at ₨ 25,000- per month.
Later on, if you want to sell the flat or house, you will need to advertise to find a buyer. Then go through the process of showing the house to many brokers and prospective buyers and bargain with them. When the deal finalized, you will get a good part of the money as Black Money in a suitcase. You will have to hide this money and always live in fear of robbers and the tax authorities.
Creating wealth through investments in Shares
Rather than going for a loan at a younger age, you could make investments in Shares or Mutual Funds. Some Mutual funds have some tax saving schemes. If you should choose some high-growth stocks and invest in them, within 10 to 15 years, you could have enough money to buy a good flat without any loan. To find the right companies to invest in India, you should do some research. Share Market in India today is starting to boom, so this is a good time to buy shares in India. Investing in shares of blue-chip Companies will get you long-term appreciation.
History of Share Prices in India compared to Dow Jones Index
The Dow Jones Industrial Average (DJIA) of USA is the most famous and one of the oldest Stock Indexes in the world. We will examine the performance of the DJIA with our Indian BSE SENSEX or the NSE NIFTY.
To show the growth in value of shares over time, we make use of Share Market Graphs. The year is on the horizontal X-axis and the value in the vertical Y-axis. The Dow Jones Industrial Average (DJIA) takes into account the Share value of the leading American Companies. The chart below shows the performance of DJIA from the year 1884 till 2011, that is over a period of 127 years. You can see the steady rise in its value over the years.
Please note that in the chart below, the ‘Y’ axis or the price or index value is to the logarithmic scale. This means that Y-axis rise in value is not linear. For example, if you look at the ‘Y’ axis, the distance between 2,500 and 5000 is almost the same as between 5,000 and 10,000. If it is on the linear scale the distance between 5,000 and 10,000 (10,000 – 5,000 = 5,000) should be double that of that between 5,000 and 2,500 (5,000 – 2,500 = 2,500).
So if the graph were plotted on the linear scale, the graph would be almost vertical, bearing witness to the phenomenal rise in the value of Stocks or Shares.
Historical Dow Jones Industrial Average (DJIA) 1884 to 2011
The period of the above graph, between the year 1884 and April 2011, saw two World Wars, the great depression of the early 1930’s and the financial meltdown of 2008-2009. The share prices did fall during the time of the world wars. After the world wars, share prices kept on rising. There is nothing in the world that can stop the steady increase of share prices in the course of time.
The occasional dips or crashes in share market may look like small dips in the graph, but at the time the dip was happening, it is a catastrophic experience. The small dips in the graph of over 127 years were given several nicknames. Names like ‘Black Monday’ for the 1987 stock market crash, ‘Black Tuesday’ and ‘Black Thursday’ for the stock market crashes of 1929. But like the dips during the great depression years of the early 1930’s, it is soon forgotten. The share prices keep on climbing with occasional dips. Everyone remembers the 2008 financial meltdown. But now in the graph, it is a minor correction, but in 2008 there was panic all over the world. Now stocks are rising everywhere in the world; it will keep on going up in the future. So we must look at these dips as a buying opportunity to create wealth for ourselves.
Indian Share Market Graph
Now let us see a similar Bombay Stock Exchange BSE SENSEX Graph, which has a much shorter history than the Dow Index. In the graph below see the BSE SENSEX values from 1991 till after 2013. You can see many dips in the graph, but the graph is rising over the years. Those dips in the upward journey of the BSE SENSEX were when the crashes happened. These crashes in the Indian share market looks like minor dips in the graph, but at that time it was headline news. The upward journey of the SENSEX graph will always continue.
Now in 2017, the share prices in India are at its highest level ever. The BSE SENSEX crossed 30,000 intraday in 2015 and now in 2017 is hovering around 32,000.
Gold price rise compared to share prices in India
Below we have a comparison chart of share prices vs gold prices in the Indian market.
We have two graphs of returns from Gold investment in India compared with investment in shares of the BSE SENSEX. The first map shows the returns from Gold Vs SENSEX from May 2013 to May 2014
In the above map, you can see that the returns from gold investments were better than the returns from share market in India. But this is only for a brief short period. Gold prices tend to rise, and stock prices tend to dip, in times of crisis like if there are fears of war. But these times of crisis always passes, and shares will overtake gold investments in profitability. We have one more chart of SENSEX VS gold Prices below which shows how SENSEX always outperforms the investment in Gold.
The above graph shows the returns from Gold compared with the returns from the SENSEX over the period from 1981 to 2008, that is over a period of 27 years. Clearly, the SENSEX is better than Gold as an investment.
After 2008, even though the Gold prices rose dramatically, the BSE SENSEX of India outperformed Gold investments as is evident in the above Sensex Vs Gold Price Chart or Graph.