Mutual Funds vs. Real Estate: Which is a better investment?

Know the differences between Mutual Funds and Real Estate investments.
Mutual Funds vs. Real Estate
4 mins
11 January 2024

Investing is a necessary part of financial planning that can help you achieve your long-term goals. However, choosing the right investment option can be challenging, especially when you have to compare mutual funds against real estate as growth instruments.

What are mutual funds?

Mutual funds are investment portfolios that collect money from a large number of investors to buy a variety of securities like stocks, bonds, etc.. They offer diversification, liquidity, ease of investment, and professional management. However, they also come with certain risks, such as market volatility, fund manager’s performance, and fees and charges. Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) and are subject to various tax implications depending on the type and duration of the fund.

What is real estate?

Real estate is any property that you buy or invest in, such as land, residential, or commercial spaces. Real estate investments provide tangible assets, potential rental income, and tax benefits. However, they also involve higher upfront costs, maintenance expenses, legal procedures, and low liquidity. Real estate investments are influenced by various factors, such as location, demand and supply, infrastructure development, and economic conditions. Real estate investments are not highly regulated and are subject to capital gains tax and stamp duty.

Differences between mutual funds and real estate

  • Risk Factor: Mutual funds are subject to market risk, liquidity risks, interest rate risk, credit risks, liquidity risks, etc, which means that the value of your investment can fluctuate depending on the performance of the underlying securities. Real estate investments are subject to various risks, such as property damage, legal disputes, encroachment, fraud, and market downturns. However, real estate investments are generally considered less volatile and more stable than mutual funds in the long run.
  • Liquidity: Liquidity refers to the ease of converting your investment into cash. Open-ended Mutual funds offer high liquidity, as you can redeem your units at any time at the prevailing market price. However, you may have to pay exit load for early withdrawal in some cases. Real estate investments offer low liquidity, as it can take a long time to find a buyer and sell your property at a fair price. You may also have to pay brokerage and other charges for selling your property.
  • Investment: Mutual funds require a low initial investment, as you can start a systematic investment plan (SIP) with as low as Rs. 100 per month. You can also choose from a wide range of mutual fund schemes that suit your risk profile and investment objective. Real estate investments require a high initial investment, as you need to pay a large sum of money as down payment, registration fee, stamp duty, and other charges. You also have limited options to choose from, depending on your budget and location.
  • Gestation period: Gestation period refers to the time taken for your investment to grow and generate returns. Mutual funds have a shorter gestation period, as you can see the growth of your investment on a daily basis. However, you need to stay invested for a long-term period, preferably more than five years, to get the best returns from mutual funds. Real estate investments have a longer gestation period, as you may have to wait for several years to see the appreciation of your property value. However, you can also earn regular income from your property by renting it out or leasing it.
  • Tax liability: Tax liability refers to the amount of tax you have to pay on your investment returns. Mutual funds are subject to different tax treatments, depending on the type and duration of the fund. Equity funds are taxed at 15% for short-term capital gains (less than one year) and 10% for long-term capital gains (more than one year) above Rs. 1 lakh. Debt funds are taxed at your slab rate for short-term capital gains and 20% with indexation for long-term capital gains. Real estate investments are subject to capital gains tax, which is as per slab rate of the individual for short-term capital gains (less than 24 months) and 20% with indexation for long-term capital gains (more than 24 months). However, you can also claim various deductions and exemptions for your real estate investments, such as interest on home loan, principal repayment, stamp duty, and registration charges.

How do you decide between real estate vs. mutual funds?

  • What is your objective: Your objective refers to the purpose and goal of your investment. If you are looking for a regular income, tax benefits, and a tangible asset, then real estate may be a better option for you. However, if you are looking for diversification, liquidity, and professional management, then mutual funds may be a better option for you.
  • Capital: Capital refers to the amount of money you have to invest. If you have a large amount of capital and can afford the high upfront and maintenance costs, then real estate may be a suitable option for you. However, if you have a limited amount of capital and want to start investing with a small amount, then mutual funds may be a suitable option for you.
  • Liquidity: Liquidity refers to the ease of accessing your money. If you need your money in a short span of time and want to avoid any hassles, then mutual funds may be a better option for you. However, if you do not need your money for a long time and are willing to wait for the right opportunity, then real estate may be a better option for you.

Conclusion

Mutual funds and real estate are both popular investment options that can help you achieve your long-term goals. However, they have different features, benefits, and drawbacks that you need to consider before investing. The choice depends on your personal preferences, risk appetite, and investment horizon. You can also invest in both, if you want to diversify your portfolio even more.

Frequently asked questions

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

Some ways to invest in real estate in India are:

  • Buying physical properties, such as plots, apartments, villas, etc., and renting or selling them for profit.
  • Investing in REITs, which offer exposure to a diversified portfolio of real estate assets with lower entry barriers and higher liquidity.
  • Investing in real estate mutual funds, which are funds that invest in the stocks or debt instruments of real estate companies or REITs.
  • Investing in real estate crowdfunding platforms, which allow investors to pool their money and fund specific real estate projects in exchange for a share of the returns.
Why do investors prefer to invest their money in real estate?

Investors prefer to invest their money in real estate because:

  • Real estate is a tangible asset that can appreciate in value over time and provide capital gains.
  • Real estate can generate regular income through rent, which can also increase with inflation and demand.
  • Real estate can offer tax benefits, such as deductions for interest payments, depreciation, maintenance, etc.
  • Real estate can act as a hedge against inflation and currency fluctuations, as the value of property tends to rise with the general price level.
What is the major advantage of investing in mutual funds?

The major advantage of investing in mutual funds is that they offer diversification, which means that they invest in a variety of securities across different sectors, markets, and asset classes. This reduces the risk of losing money due to the poor performance of a single security or sector.

How is India’s real estate sector regulated?

India’s real estate sector is regulated by various laws and authorities, such as:

  • The Real Estate (Regulation and Development) Act, 2016, which establishes the Real Estate Regulatory Authority (RERA) to regulate and promote the real estate sector and to protect the interests of consumers and developers.
  • The Transfer of Property Act, 1882, which governs the transfer of immovable property by sale, gift, mortgage, lease, etc.
  • The Indian Stamp Act, 1899, which levies stamp duty on the registration of property transactions.
  • The Registration Act, 1908, which makes it mandatory to register property deeds and documents to ensure the validity and authenticity of the transactions.
  • The Income Tax Act, 1961, which imposes tax on the income from property, such as rent, capital gains, etc.
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