When you think of investing your money, real estate or gold are the options your parents suggest. However, nowadays mutual funds have emerged as a very good alternative.
In India, real estate has ceased to be a lucrative investment option. This has happened due to the below mentioned problems with real estate. Mutual funds, on the other hand, have become very popular among investors.
Earlier, the perception of people about mutual funds was that it is a risky option. This is because people used to be very risk-averse. Real Estate was considered a very safe option.
This is one of the most talked about questions from an investor point of view. Both of these investments are for the long haul i.e., both the investments demand patience from the investor.
Nowadays, due to a very volatile real estate market, mutual funds are becoming the preferred option.
In this article
- Points to Consider: Real Estate vs Mutual funds
Which Gives Better Returns: Real Estate or Mutual Funds?
The best way to challenge myths is to look at data and come to conclusion.
The trouble is that India’s real estate sector is very opaque and does not give us enough data points to do a proper job of analyzing it.
In the process, the myth that any real estate investment yields massive amounts of returns at all points of time continues to persist.
Returns from Investment in Real Estate:
Here is a table showing the average returns on investment in real estate for a 5 and 10-year tenure.
Suppose you invest around ₹50,00,000 in real estate of a big Indian city, these would be your returns.
|5 Year Avg. Rate of return||5 Year|
|10 Year Avg. Rate of return||10 Year|
* Average data is taken for simplicity of calculation
Returns from Investment in Equity Oriented Mutual Funds:
Here is the table showing the average returns on investment from equity-oriented mutual funds for a 5 and 10-year of investment tenure. Suppose you invested around ₹50,00,000 in the least risky equity mutual funds and the returns you would have got at the end of 5 and 10 years are shown.
|Equity Oriented Mutual Fund||Type||Initial Investment|
|5 Year Avg. Rate of Return||5 Year Final Amount||5 Year Avg. Rate of Return||5 Year|
|SBI Bluechip Fund||Large Cap||₹ 50,00,000||18.04%||₹1,14,87,341||18.03%||₹2,62,35,786|
|Mirae Asset India Equity Fund||Large Cap||₹ 50,00,000||20.62%||₹1,27,34,627||16.55%||₹2,31,25,588|
|Reliance Large Cap Fund||Large Cap||₹ 50,00,000||17.86%||₹1,13,32,553||16.91%||₹2,38,49,903|
|Aditya Birla Sun Life Advantage Fund||Multi Cap||₹ 50,00,000||22.38%||₹1,38,32,190||20.61%||₹3,25,68,907|
|DSP BlackRock Opportunities Fund||Multi Cap||₹ 50,00,000||19.66%||₹1,22,81,725||18.83%||₹2,80,69,261|
By comparing both the tables above, we can easily come to conclusion that large and multi cap equity funds tend to give higher returns compared to real estate in the long-term.
In the large and multi-cap type of mutual funds, the investment is made in large-cap companies.
These funds have historically given returns between 15% and 20%. Moderate risk is involved and it is suggested to invest in these funds for more than 5 years.
Points to Consider: Real Estate vs Mutual funds
Real estate investments are very unpredictable. There is a wrong perception among people that real estate is an investment which will always go in the upward direction. But it is not always so.
The values also go down. The primary reason for that is unpredictability. For example, the value of the land on the outskirts of a city 10 years back can move upwards due to the development of the area.
Whereas the same area after development might not be very lucrative for investors, due to increased traffic menace. Hence, the value of the same plot of land is reduced.
Now, when we talk of mutual funds, you might think that it’s a risky investment.
But that’s not always true. There are debt and conservative hybrid mutual funds that provide a low to moderate amount of risk to investors. Therefore, these funds are not very volatile.
2. Real Estate Is Underperforming
Real estate investments are quite under-performing in nature. They offer less than or equal to the same amount of returns as a fixed deposit.
Real estate investment often fail to bear the effect of inflation. Mutual funds take the effect of inflation in their returns.
3. Litigation/ Disputable
There is a chance of your investment to be caught in a dispute or litigation. This becomes quite tedious and inconvenient for the investor.
In India especially, a can go on for years, so it becomes very difficult for the investor to cope up with the situation. Ultimately, it is a destruction of the wealth of the investor who has invested their hard earned money in the real estate market.
Mutual funds, on the other hand, are not marred by this problem. Mutual funds are well regulated.
So the risk of the dispute is very low.
4. Emotional Investment
Real Estate is generally an emotional investment.
It is not just the investment of money from the investor, but also an investment of memories & emotions that the investor might have invested in the particular property.
Due to this, the investor faces the risk of two kinds of losses i.e., monetary as well as emotional.
Mutual funds are not emotionally invested in by the investor. They are invested through proper research. Plus, there is a fund manager for every fund, who is constantly researching the market and making informed investment decisions.
5. Tracking of Investment is not feasible
Unlike mutual funds, the investor cannot track their investment in real estate. In mutual funds, the investors can track their investments online and can monitor the growth/decline in their investment.
In real estate, such tracking is not possible. This creates a risk in the investment as one cannot monitor the investment properly.
This ultimately leads to the dispute problem as pointed out in point no. 3 above.
6. Slow Returns
Real Estate comparatively gives you fewer returns with the same time investment.
For example, investment in real estate of ₹ 50 lacs for a period of 30 years would give you lesser returns as compared to the investment of ₹ 50 lacs in mutual funds for the same amount of time.
7. Real Estate Needs Large Funds (Always!)
Real estate requires an investment of large amounts of a sum. The amount is to be invested in the property at one go. This might become a very risky option for the investor.
A salaried employee might not have that many funds at their disposal to invest in the property.
Mutual funds, on the other hand, gives the investment options to invest in the equity market either by lump sum or by investing small amounts through a SIP at regular intervals.
The amount is debited automatically from the investor’s bank account making a very convenient option.
8. The Liquidity Factor
Mutual Funds give liquidity to the investor. There is a market available for investors to sell their investment.
.So, it does not take much time to sell their investment and ensure liquidity.
In the case of real estate, there is not a ready market available to sell your property. It will take time for you as an investor to sell your property rather than quickly. So, if an investor is in need of money, real estate might become a difficult option.
9. Saving Tax
Mutual funds are tax saving investments. If the investors invest in Mutual Funds, they would be eligible for a deduction of maximum ₹ 1,50,000 under Section 80C of the Income Tax.
It helps them reduce the investor’s taxes to a large extent.
Real estate investments help save tax but they do not give an exemption like mutual funds. For example, if an investor has a property registered in the year 1991, then during the sale of the property in 2019, the value of the property would be calculated after applying indexation.
Indexation helps in capturing the effect of inflation in the value of the property which in turn reduces the amount of tax the investor has to pay on the property.
But real estate does provide tax exemption to the investor like mutual funds.
10. Compounding Power
Mutual Funds have the benefit of compounding. This gives very good returns to the investors.
For example, if you invest ₹ 1,00,000/- in mutual funds for 20 years and suppose the percentage return is 12%. The amount which the investor will receive at the end of 20 years would be ₹ 9,64,629/-.
The benefit of compounding effect will not be there with the investor if they invest in real estate.
11. Higher Returns
Real estate in India gives a return ranging between 6-12% annually. In the case of mutual funds, the returns are comparatively higher which is in the range of 15-20% annually.
For example, suppose an investor invests 1,00,000/- in real estate and the return is 12%. The investment is for a 5 year period. The value after 5 years would be ₹ 1,76,234/-
And for the same investment, with a return of 15%, mutual funds would give the investor a return of ₹ 2,01,135/- which is ₹24,901 higher than real estate investment.
Mutual Fund investments are very convenient.
The amount is auto-debited from the account of the investor at regular intervals. The process is also very simple and is not time-consuming.
Real estate investments are not very convenient. It requires a lot of paperwork and a lot of procedures are involved in it. There are also a lot of expenses involved in real estate like stamp duty charges, annual maintenance charges, mandatory registration of the property, etc.
Mutual funds do not involve the above expenses.
Even today, real estate is considered by people as a symbol of security. But that is debatable.
Real esate in recent times has become a risky option.
As the above points suggest, mutual funds are a better option if you want to consider diversifying your portfolio and generally when you compare it as an investment medium.
The real estate market in India is in a dire state and it will remain so for some time now.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.
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