Real estate vs mutual fund – Which is a better investment option?

Real estate and mutual funds are among the most popular investment avenues in India. However, both have their unique features, benefits, and potential drawbacks. In this article, we will compare real estate vs mutual fund from an investment perspective, analysing their liquidity, investment capital needed, risk and return, and taxation. 

• Table of contents

1. What are mutual funds?
2. What is real estate?
3. Features of mutual fund investments
4. Features of real estate investment
5. Comparison of mutual funds and real estate
6. How to choose between real estate vs mutual funds?

What are mutual funds?

A mutual fund is an investment vehicle that pools money from multiple investors to invest in securities like stocks, bonds, and short-term debt.

Here are its key features:

• Pooled investment: Rather than investing individually, money is combined from many investors.
• Professional management: A team of managers selects and researches investments on behalf of the fund.
• Diversification: The fund holds a range of investments, reducing the impact of poor performance from any single asset.
• Accessibility: Suitable for investors with different experience levels and capital.

Types of mutual funds

• Equity funds: Focus on stocks.
• Debt funds: Focus on bonds.
• Hybrid funds: Mix of stocks and bonds.
• Index funds: Track a specific market index, like the Nifty50 or BSE Sensex.

What is real estate?

Real estate refers to land and/or any permanent structures attached to it, such as buildings, roads, and other improvements.

Characteristics of real estate

Immobility: Land is fixed and cannot be moved.

Durability: Generally considered long-lasting.

Uniqueness: Each piece of land is unique in location, size, and features.

Types of real estate can include:

Residential: Homes, apartments, and townhouses.

Commercial: Office buildings, retail stores.

Industrial: Warehouses and factories.

Land: Agricultural or undeveloped land.

Special-use: Schools, hospitals, government buildings.

Features of mutual fund investments

Mutual funds are investment vehicles that pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. Some of the key features of mutual fund investments are:

• Diversification: Mutual funds invest in a diversified portfolio of securities, which helps to mitigate risk and optimise the return potential.
• Professional Management: Mutual funds are managed by experienced and skilled fund managers who actively monitor the market and make adjustments to the portfolio to ensure a balanced risk/return profile.
• Liquidity: Certain mutual funds offer high liquidity, meaning investors can easily buy or sell their units at any time.
• Variety: There are various types of mutual funds available, such as equity funds, debt funds, hybrid funds, and sector-specific funds, which cater to different investment objectives and risk appetites. To determine how much you should invest regularly to achieve your specific goals, an SIP calculator can be a valuable tool in helping you assess the impact of these different funds on your long-term wealth. You can also consider a step up SIP, where your SIP contributions increase by a fixed percentage (set by you) at regular intervals. An SIP step up calculator can help you visualise the potential impact of such an incremental approach on your final corpus compared to a regular SIP. For those considering a one-time lumpsum investment, a lumpsum mutual fund calculator can similarly assist their planning process. These calculators estimate the potential returns on your investment based on your investment amount, tenure and expected returns. Do note, however, that there is no assurance that the calculators' estimates will be achieved.
• Regulatory Oversight: Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which ensures that investors' interests are always protected.

Features of real estate investment

Real estate investment involves buying, owning, and managing property to generate rental income or sell property for gains. Some of the key features of real estate investment are:

• Physical Asset: Real estate is a physical asset that can provide a sense of security to investors.
• Rental Income: Real estate investors can earn rental income by renting out their property, which can provide a potentially steady stream of income.
• Capital Appreciation: Real estate properties tend to appreciate in value over time, providing a potential long-term return on investment.
• Leverage: Real estate investors can use leverage, meaning they can borrow money to finance their investment.
• Hands-on Involvement: Real estate investors need to be actively involved in managing their property, including finding tenants, collecting rent, and maintaining the property.

Differences between mutual funds and real estate

Let us look at real estate vs mutual fund investment based on certain key parameters:

• Liquidity: Most mutual funds offer higher liquidity compared to real estate. Investors can easily buy or sell their mutual fund units anytime, whereas real estate investments require time and effort to sell the property.
• Investment Capital Needed: Real estate investments typically require a larger sum of capital compared to mutual funds. Investors need to have sufficient funds to purchase property, pay closing costs, and cover ongoing expenses such as maintenance and property taxes. Mutual funds, on the other hand, have lower entry barriers, with investors able to start investing with a relatively small amount of money.
• Risk and Return: Both mutual funds and real estate investments carry risk, but the nature of the risk differs. Mutual funds are generally considered to be relatively less risky, as they invest in a diversified portfolio of securities, which helps to spread risk. Real estate investments, on the other hand, are subject to market fluctuations, and the risk of tenant vacancies, damage, and changes in local market conditions. However, real estate investments also offer the potential for higher returns, as property values can appreciate significantly over time.
• Taxation: Mutual funds and real estate investments have different tax implications. Mutual fund investments are subject to taxation, with investors needing to pay taxes on their capital gains depending on the nature of the fund. Real estate investments also incur taxes, including property taxes, capital gains tax (on sale of property), and rental income tax. However, real estate investors can also claim deductions for mortgage interest, property taxes, and operating expenses.

How to choose between real estate vs mutual funds?

Choosing between real estate and mutual funds depends on your financial goals, risk tolerance, and investment horizon. Here's a comparison:

Real estate

Pros:

• Potential for high returns in the long term through property appreciation
• Potential for steady rental income
• Tangible asset offering a sense of ownership
• Potential hedge against inflation as property values tend to rise

Cons:

• High initial investment and ongoing maintenance costs
• Illiquidity, making it difficult to sell quickly
• Limited to specific geographic locations
• Impacted by local market conditions and interest rates
• Risk of significant loss if property rates don’t appreciate in certain economic conditions or areas.

Mutual funds

Pros:

• Diversification across sectors, reducing risk.
• High liquidity, easy to buy and sell units.
• Professional management by experienced managers.
• Accessibility with lower entry barriers.

Cons:

• Subject to market volatility, especially equity funds.
• Management fees and other expenses.
• Lack of physical asset ownership.
• No guarantee of returns, potential underperformance.

Decision guide

Risk tolerance: Mutual funds, especially those investing in equities, tend to be more volatile than real estate.

Investment horizon: Real estate is usually a long-term investment, while mutual funds can cater to both short- and long-term goals, depending upon the scheme category.

Financial goals: Both investment avenues can offer capital appreciation potential in the long term. However, mutual funds can cater to a wider number of goals owing to their liquidity, accessibility, variety and flexibility

Liquidity needs: Mutual funds provide greater liquidity compared to real estate.

Available capital: Real estate typically requires a larger investment.

Conclusion

Both mutual funds and real estate investments have their pros and cons, and the choice for investors depends on their individual financial goals, risk appetite, and investment horizon. Mutual funds offer higher liquidity, lower entry barriers, and professional management, making them a good option for investors seeking diversification and convenience. Real estate investments, on the other hand, provide a physical asset, rental income, and potential long-term capital appreciation, but also require a larger investment capital and hands-on involvement. On the other hand, using a Compound Interest Calculator can help you estimate the potential growth of your investments in both asset classes. This tool helps you understand how minor adjustments in your investment today can lead to substantial returns over time. Investors should carefully evaluate their options and seek professional advice before making an investment decision.

FAQs

What is the minimum amount required to invest in mutual funds?

The minimum amount required to invest in mutual funds varies depending on the fund house and the scheme. Some mutual funds have a minimum investment requirement of as low as Rs. 500.

How do I choose the right mutual fund scheme?

Choosing the right mutual fund scheme depends on your investment objectives, risk appetite, and investment horizon. It's also recommended to consult with a financial advisor or conduct thorough research before selecting a mutual fund scheme.

Can I invest in real estate without directly owning property?

Yes, there are alternative ways to invest in real estate without directly owning property. One option is to invest in real estate investment trusts (REITs), which are companies that own or finance real estate properties and provide a way for individuals to invest in a diversified portfolio of properties. Another option is to invest in real estate crowdfunding platforms, which allow individuals to invest in specific real estate projects or properties and earn potential returns through rental income or property appreciation.

Which is better, FD or real estate?

Real estate offers long-term growth potential but requires a high initial investment and maintenance costs. Capital appreciation happens over a considerably long horizon and it is an illiquid asset, with no option of part redemption. Fixed deposits, meanwhile, are safe and offer a fixed interest rate, which means that returns are predictable. Also, they do not require high investment and are more liquid than real estate. You may incur a penalty for breaking a fixed deposit before maturity.

So, real estate may be suitable for investors who have a high initial investment amount, a long horizon, and are seeking long-term capital appreciation potential. Fixed deposits may be more suitable for investors who want guaranteed and predictable returns, especially if the investment horizon is short.

Which real estate investments are the most profitable?

Different types of real estate investments offer different pros and cons. Residential real estate can offer a steady income stream if given for rent. It can also benefit from potential property appreciation. However, it requires maintenance and tenant management. Commercial and industrial real estate has the potential to yield very high returns but demands a higher initial investment and is sensitive to economic shifts. Buying land also holds potential for high returns, especially if the area develops, but it requires patience and strategic location choices.

Key factors affecting profitability for real estate include location, market conditions, property management, financing costs, and the potential for property improvements.

What are some ways to invest in real estate in India?

There are various ways to invest in real estate, each with its advantages and challenges. Direct property ownership offers potential for high returns but involves significant costs and maintenance. You can also invest through real estate investment trusts (REITs), which provide liquidity and diversification.

What is the advantage of investing in mutual funds?

The primary advantage of investing in mutual funds is diversification, which helps spread risk, and professional management. By pooling funds from various investors, mutual funds invest in a mix of securities, reducing the impact of poor performance from any single asset. Indviduals can access such a portfolio even with small amounts because the money is pooled together from a large number of investors. Moreover, mutual funds are professionally managed, so investors do not need market knowledge and do not need to independently buy, sell or monitor each asset in the portfolio.

Is real estate better than mutual funds?

Neither investment avenue is inherently better, and the suitability depends upon the individuals’ goals, needs, preferences, investing capacity and risk appetite. Real estate offers tangible assets, rental income, and potential inflation protection. However, it requires high initial capital, is illiquid, and involves significant maintenance costs. In contrast, mutual funds are more liquid, diversified, and less maintenance-intensive, making them suitable for different investment goals and risk profiles.

What is the return rate of real estate?

The return rate on real estate in India varies based on factors like location, property type and market conditions. Rental rates can also vary significantly depending upon location and property type,

Is real estate better than mutual funds?

It depends on liquidity, returns, and goals. A wealth calculator makes it easier to plan SIPs for mutual fund investments tailored to your financial aspirations.

How can I choose between mutual funds and real estate for long-term goals?

Mutual funds are often more liquid and accessible. A calculator for retirement helps estimate the SIP amount you’d need to reach your desired retirement corpus when comparing investment options.

How do I compare returns from a mutual fund vs real estate?

Mutual fund returns can be tracked using a Compound Annual Growth Rate or CAGR calculator to find their compound annual growth rate. While real estate returns are harder to calculate, you can look at the property's initial and current value to see how much it has grown year on year.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.