Real Estate Vs Mutual Funds – The Better Option

19 May 2022
5 min read
Real Estate Vs Mutual Funds – The Better Option
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Which is a better investment, mutual fund or property? Deciding between real estate and mutual funds is not an either/or question. Simply put, one cannot be positioned against the other option. You can be invested in both or any one of them, but picking one option against the other is misleading.

Nevertheless, there are a series of factors that can help you decide what suits you better: real estate or mutual funds and how can you decide how much to invest in each of them.

Mutual Funds

Investing in mutual funds vs real estate requires us to understand the basic tenets of both products. So before we jump into decision-making, let’s first understand what mutual funds are and how they work.

Mutual funds work as assortments of a particular asset class. Like, equity mutual funds hold stocks of different companies, and debt funds hold bonds or money market instruments issued by different companies or governments. There are different kinds of equity funds and debt funds, respectively.

For example, in equity funds, the different subcategories depend on the market cap (large-cap fund, mid-cap fund, small-cap fund, multi-cap fund), tax-saving feature (ELSS), sectoral or thematic (consumption, banking and PSU, pharma etc.) and more subcategories.

Similarly, debt funds too have various subcategories depending on the maturity of the holdings (liquid, ultra-short, short term, etc.), quality of the assets (credit risk funds, etc.) and many more.

Some hybrid fund categories provide a decent mix between the two major asset classes. There are gold funds, as well.

Real Estate

Real estate or mutual funds are investment options but one of the key differences is that real estate can be treated as an investment or can be channelised for personal use.

Real estate is any property that you buy or invest in. It could be a residential space, a whole building or a commercial plot for business purposes. Buying land too comes under the larger umbrella of real estate.

Ways to Invest in Real Estate

Investing in mutual funds vs real estate cannot be a one-line answer as there are multiple ways you can invest in them.

Here are a few ways by which you can invest in real estate:

  • Property and Land

Buying property (residential, commercial, etc.) or land is a direct way of having investment exposure to real estate. You can buy a property or land, hold it till prices appreciate and then sell it off. In the holding period, you can either use it or rent it out or channelise it in any other way. The main point is that if you get a premium on selling the property or land, that will be the profit from your investment.

  • REIT

Reit stands for a real estate investment trust. They are companies or trusts that own commercial real estate spaces. When investors put their money in REITs, the pooled amount is used to invest in these commercial spaces.

To put it differently, the commercial spaces are the holdings of a REIT. Our income from REITs is the rent and the money we get back in maturity.

  • Stocks and Mutual Funds

There may be mutual funds with high exposure to stocks of real estate companies. Such mutual funds and stocks of listed real estate companies just give you some exposure to the growth of the companies involved in the sector. Stocks and mutual funds, in this context, is not necessarily a way to invest in real estate because you’re not investing in a property or in a trust that does that for you. You are simply taking advantage of market movements in the sector.

How Do You Decide Between Real Estate vs Mutual Funds?

  • What is Your Objective

You need to be clear about your investment objective. If you know why you are investing, it will be easy to figure out which way you want to go. How much do you want to invest, by when do you want the money back, how much risk can you take etc. When it comes to real estate, ‘where’ do you want to invest also becomes an important question. This is because there are huge price variations in different geographies of the country. Answer some basic questions like these before finalising which is a better investment, mutual fund or property.

  • Capital

Capital required when investing in real estate, especially property or land, can be in lakhs and crores as well. Mutual funds, on the other hand, have an option for as low as Rs 100 per month as well. The minimum investment in REITs can vary, depending on the trust. Like, the minimum investment in the Mindspace Reit was Rs 55,000 for 200 units, in the Embassy REIT, the minimum investment was around Rs 2.4 lakh for 800 units. Rules keep changing. Check why you want to invest and if the capital required is falling in line.

  • Liquidity

You also need to be aware of the liquidity aspect. The turnaround time for selling a house or commercial space and the realisation of the sale amount in your bank account may vary. It may be quick or may take many months, as it is not certain. In mutual funds, liquidity varies for a few categories, but Sebi has mandated the turnaround time.

You may also want to read REIT vs Physical Real Estate: Which is a Better Investment?

Final Words

Many are always confused between real estate vs mutual funds but there are no hard and fast rules when it comes to investments. You can invest in both proportionately depending on what suits you more. The high capital requirement in real estate may deter many of us. Stretching your finances more than you can to invest may not be possible for all of us.

None of your investments can be right or wrong on a relative note. A good investment is one that suits you and bad investment is one that does not suit you. Know what is best suited for you based on the factors and make an informed decision.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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