Many investors, especially the new ones are lost in this common question: mutual funds or real estate – which is better?

Real estate had always in demand and historically, the prices had been going up sharply. Between 2000 and 2010, the prices hardly ever went down. This changed around 2011 when property rates stopped climbing as fast as they were before.

On the other hand, people have different perceptions about equity mutual funds. They believe that mutual funds are very risky and investing in mutual funds is akin to gambling. Also, many believe returns generated in mutual funds are far less than in real estate.

Let us look into the various parameters and decide which is better for investment.

Mutual Funds vs Real Estate: Where Should You Invest?

1. 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.

City Initial Investment
5 Year Avg. Rate of return 5 Year
Amount
10 Year Avg. Rate of return 10 Year
Amount
Mumbai ₹50,00,000 12% ₹88,11,709 15% ₹2,02,27,789
Delhi NCR ₹50,00,000 6% ₹66,91,128 9% ₹1,18,36,819
Kolkata ₹50,00,000 6.5% ₹68,50,434 7% ₹98,35,757
Bengaluru ₹50,00,000 7.3% ₹71,11,622 10% ₹1,29,68,713
Kochi ₹50,00,000 6.8% ₹69,47,464 8.5% ₹1,13,04,918

* 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
Final Amount
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.

2. Risk Associated in Real Estate and Mutual Funds

Only the ignorant investors will claim that real estate is less risky than equity mutual funds.

The matter of the fact is that both equity mutual funds and real estate belong to the growth asset category.

The performance of both real estate and equity mutual funds as an asset category majorly depends on the performance of the overall economy.

If the GDP grows at 8% you can expect the real estate to grow at 12-13% and equity mutual funds to grow at 16-18%.

But equity mutual funds are less riskier as compared to real estate investment because of its premise of diversification. It means mutual fund spreads your investment across asset classes and stocks, to reduce risk.

With equity mutual funds, you get the advantage of default diversification. Sudden changes in one stock are likely to be balanced out by the performance of other stocks in the fund. It is an ideal way to get a taste of the equity markets, but with lesser risk.

Whereas, diversification of the portfolio is not possible in real estate investment.

3. Various Types Of Investments

In equity mutual fund, you have many options to choose from depending on your risk appetite and investment goals. Real estate doesn’t give you many options in terms of risk associated and returns on investment.

These are the various types of equity oriented mutual fund. The risk associated with each type of equity mutual fund can be minimized if invested for a longer duration.

Equity Oriented Mutual Fund Risk Associated Returns Ideal tenure of investment
Large Cap Funds Low 12-18% 4 years and above
Mid Cap Funds Moderately High 15-20% 6 years and above
Small Cap Funds Very High 16-22% 7 years and above
Multi-Cap Funds High 13-20% 5 years and above
ELSS Funds Moderate 12-20% 5 years (3 years is mandatory)

* Returns mentioned are based on historical data and are for long-term investment tenure.

** Risk associated are relative, in equity mutual fund category.

4. Considering Inflation

If we look at average returns per year across different Indian cities from June 2013 onwards, very few cities have given a return greater than 10% every year, which is what is needed, in order to meet the regular expenses for upkeep of real estate, along with beating the rate of inflation.

Real Estate investment yields are often not able to beat the inflation significantly as it depends upon the location of the property primarily.

The real estate returns being able to beat inflation happens only at selective places and mostly it fails to do so in general.

Equity mutual funds in general, are able to beat the inflation with their promising nature and performance.

5. Taxation on Returns

Equity mutual funds can be tax-efficient investment avenues that can help reduce your tax burden and at the same time increase your wealth.

Equity Linked Savings Scheme (ELSS) Mutual Funds offer tax benefits under section 80C of the Income Tax Act. As per this section, one can avail tax exemptions up to INR 1,50,000 by investing in ELSS funds.

An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high returns.

The list of features of ELSS Funds:

  1. Tax-saving
  2. Three-year lock-in period
  3. Can be held even after the completion of three years
  4. Offers dividend as well as growth options

Whereas, yields from Real Estate is taxable after indexation. This indexation helps in lessening the tax burden by taking inflation into account but they do not give tax relief like ELSS funds do.

6. Liquidity

Liquidity refers to the speed at which you can recover your money in case you want to sell your property or redeem your mutual funds.

Liquidity of equity mutual fund is very high. You can easily sell an equity mutual fund scheme if it underperforms.

There are many liquidity challenges in real estate:

  1. It could be a buyer’s market when you need urgent cash and it might not be easy to find a buyer.
  2. An urgent sale usually fetches much less than the true value of the asset.

Selling and redemption of mutual funds takes a maximum of seven working days, meanwhile selling off property could prove to be a herculean task at times.

You may be required to wait for weeks or months to find a suitable buyer for your property. Hence, equity-oriented mutual funds offer much higher liquidity as compared to real estate.

7. No Hidden Charges

Apart from transaction fees, equity mutual funds don’t have any hidden charges whereas, real estate has several hidden charges such as maintenance of the property, registry and stamping charges etc.

Some of the hidden charges associated with real estate investments are:

Hidden charges Description
Transaction Cost The cost involved are stamp duty, appraisal fees, reality valuator’s fees, laboratory fees for checking the construction quality, fees to the lawyer’s etc
Statutory Dues These include regularization charges, land usage conversion charges, transfer charges, development charges, map charges or documentation verification charges by various authorities.
Middleman’s commission For residential property the rate is 2% of the transaction
Home Insurance When you are buying a new property to shift, you  need to get a home insurance done. The cost will depend on the size, location, value of household articles and the cost of the property.
Mortgage Cover If the new property is bought on a loan, one should also get an additional life insurance cover.
Parking and other expenses If the new property is a flat, you need to pay a lump sum for life or annual parking fees for parking your vehicles.
Utilities When you are shifting to a new residence, you may also be required to acquire new utility connections like, electricity, telephone, cooking gas etc.
Moving Expenses Finally, you have completed all the formalities and ready to shift to your new home, but you should be ready with the expenses pertaining to new furniture, curtains, electronic goods etc.

8. Research Is Required

When comparing real estate and mutual fund, one major factor that must be considered is research.

Investing in property requires a lot of time in deciding on which plot or flat to buy whereas, it takes lesser time to learn about equity mutual funds.

A fund house with a professional fund manager does the research for equity mutual funds like picking the right stocks, tracking them and keeps you updated with the current market scenario by displaying the holdings of mutual funds.

Which homeowner knows the value of their flat or plot on a day-to-day? Online tracking of  your stock portfolios in equity oriented mutual funds  gives you great transparency.

9. Systematic Investment Is Propagated

Mutual Funds have the option of systematic investment in the form of SIPs (Systematic Investment Plans). Real Estate investments have no such provision.

An SIP is an option, wherein the investor can invest a fixed sum in a mutual fund scheme on a regular basis i.e. predefined regular interval. It is similar to regular saving schemes like a recurring deposit.

Read More: 13 Things to Know About SIP.

Most financial advisers and a large number of investors prefer investing in equity mutual funds through SIPs. The obvious benefit of SIP is that it helps investors to average the rupee cost of a unit thereby helping investor earn higher returns in the long-term.

Hence, it is recommended to stagger the investments over the whole financial year, as it will help investors to average their purchase cost. It also helps them to invest in a disciplined manner no matter what the current market is.

Paying EMI for a home loan is somewhat like an SIP, wherein you keep increasing your share in your home (equity or ownership) with each installment. Mind you, taking a loan and buying a house is discounting your future earnings to today and so it comes with a cost such as interest.

10. More Convenient

And finally, investing in mutual funds is now a piece of cake. The whole process is offered online by many players in the mutual fund industry. Starting an SIP or even making a lump sum investment can be done in a matter of few clicks.

Even tracking the performance of your investment can be done easily online. You can set up a bank mandate for monthly investments and set your SIP on auto-pilot mode.

The SIP amount is automatically debited every month from your account.
In short, mutual funds today, provide the right ground for investing with the least effort.

Conclusion

Based on the above comparative analysis on 10 parameters, one should think twice (or even ten times) before buying a home for the purpose of investment. One should carefully weigh all the available data and then take a wise call.

If you are a salaried employee, you may not have a huge surplus to invest. Then you may be compelled to take a home loan and invest in property.

The best alternative will be to have an SIP in equity mutual funds, you will end up better off.

Both real estate and mutual funds are powerful investment options and you must understand your financial goal to be able to make a choice between the two. In case you want a home to live and you are under family pressure, then you can take a home loan.

Best Alternatives Funds for Real Estate Investment

These are the 5 equity oriented mutual funds which can beat real estate investment any day.

1. SBI Bluechip Fund

This is a Large Cap Equity Oriented Mutual Fund launched on January 1, 2013. It is a fund with moderately high risk and has given a return of 18.03% since its launch.

Performance over the years:

Duration Returns
1 year  10.71%
3 years  11.42%
5 years  18.04%

 

2. Mirae Asset India Equity Fund 

This is a Large Cap Equity Oriented Mutual Fund launched on January 1, 2013. It is a fund with moderately high risk and has given a return of 16.55% since its launch.

Performance over the years:

Duration Returns
1 year  11.28%
3 years  13.33%
5 years  20.62%

 

3. Reliance Large Cap Fund

This is a Large Cap Equity Oriented Mutual Fund launched on January 1, 2013. It is a fund with moderately high risk and has given a return of 16.91% since its launch.

Performance over the years:

Duration Returns
1 year  9.83%
3 years  10.27%
5 years  17.86%

4. Aditya Birla Sun Life Advantage Fund

This is a Multi-Cap Equity Oriented Mutual Fund launched on January 1, 2013. It is a fund with high risk and has given a return of 20.61% since its launch.

Performance over the years:

Duration Returns
1 year  9.72%
3 years  13.04%
5 years  22.38%

 

5. DSP BlackRock Opportunities Fund

This is a  multi-cap equity oriented mutual fund launched on January 1, 2013. It is a fund with moderately high risk and has given a return of 18.83% since its launch.

Performance over the years:

Duration Returns
1 year  9.57%
3 years  14.36%
5 years  19.66%

Read More: 10 Secrets Only Successful Mutual Fund Investors Know

To know more tips of investing in a mutual fund, Read More: 10 Tips on investing in Mutual Funds

Happy Investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.