The world of investments has expanded by leaps and bounds such that investors today are spoiled for choice — as to what securities they ought to invest in. Among the many securities on offer, you may wonder whether you even want to invest in the markets or whether buying an alternative asset would be more appropriate. It is within this space that the real estate investment vs mutual funds argument arises. Read on to understand covered the differences what’s the right investment for you. Also, learn about the best real estate mutual funds in India.
Mutual Funds vs Real Estate – Differences Explored
Mutual fund investments differ from real estate across the following categories that have each been explored in the table below.
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Differences
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Area of Consideration
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Mutual Funds
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Real Estate
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Compounding
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Mutual fund investments carry the power of compounding, allowing you to generate greater returns over time.
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Real estate investments aren’t linked to the power of compounding.
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Consistency
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Mutual funds are more consistent than real estate and have accrued inflation-beating returns over the past few years.
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Real estate holdings are inconsistent in terms of the value they provide. While their value can rise over time, it can also be low due to issues like lousy access to urban areas, barren nature or just poorly located.
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Ease of investing
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Mutual funds are relatively easy to invest in and don't require much work.
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Real estate investments can be time-consuming as they require a lot of paperwork to be completed.
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Fees
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The fees under mutual funds include operational costs, fund management fees, transaction fees and advisory fees, among others.
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If you buy real estate, you must pay for stamp duty, pay CERSAI charges and registration charges.
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Investment Avenue
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You can either invest in a fund via a lump sum payment or use a systematic investment plan (or SIP) to invest in instalments.
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A large sum of money (i.e., a lumpsum payment) is needed to invest in real estate, depending on the location.
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Level of Liquidity
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These funds provide investors with considerably more liquidity than real estate holdings. The sale and redemption of mutual fund units take 7 working days.
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Liquidating real estate can take considerable amounts of time. In certain circumstances, finding the right buyer for your property may take years.
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Performance
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These funds are popular among investors who seek to accumulate wealth despite inflation. Here, compounding's power helps investors accrue greater returns.
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Real estate investments are no different from fixed deposits as they provide similar returns. Furthermore, the property isn’t always able to perform in instances of inflation.
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Risks Involved
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Investments in mutual funds are relatively safer than real estate. It's because mutual funds have investments in various assets. So, if one asset underperforms, the risk can be spread among other assets.
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Investments in real estate are riskier than mutual funds. In case of an economic slowdown, the value of the property might not be sold for its true value.
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Tangibility
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Mutual funds aren't tangible.
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Real estate is tangible and can be seen.
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Taxes Applicable
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Mutual funds (in the case of ELSS funds) act as tax-saving investments as per Section 80C of the Income Tax Act. Tax benefits of up to INR 1,50,000 apply on mutual fund investments, allowing investors to save on taxes.
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It is possible to save on taxes via indexation, which brings down the applicable taxes keeping in mind inflation’s impact on a property’s value. That said, the tax exemptions offered here are lower than those provided to mutual fund investments.
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Tracking
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It is possible to track the performance of mutual funds online.
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The performance of real estate investments can’t always be monitored.
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Exploring the Happy Medium – Real Estate Mutual Funds
Still can’t decide about real estate vs mutual funds? Try mutual funds that invest in real estate investment trusts (or REITs), and real estate operating companies. REITs exist in the form of associations, trusts or corporations and directly invest in real estate via properties or mortgages. These trusts take on three major forms i.e., hybrid REITs, mortgage REITs and equity REITs.
Get the benefit of liquidity, protection from inflation, and a stake in real estate without getting into the nitty gritty. Now that’s getting the best of both worlds!
Frequently Asked Questions
1. Do mutual funds invest in real estate?
Yes, real estate mutual funds invest in real estate via real estate operating companies and real estate investment trusts.
2. How do beginners invest in real estate?
Beginners who do not have ample sums of money to invest in real estate on their own can begin by investing in real estate mutual funds or even real estate investment trusts. Smaller investments are permissible here. If mutual funds do not interest you, then it is advisable to first read up thoroughly about the real estate investment process before investing.
3. What is the 5 per cent rule in real estate investing?
The 5 per cent rule states that investors shouldn’t direct more than 5 per cent of their portfolio’s funds into one investment.
As far as real estate investing goes, you should multiply the value of the property in question by 5 per cent and then divide the resultant number by 12 to understand the breakeven point. Should the monthly rent applicable to a property of the same kind fall below the breakeven point, it’s financially viable to rent it. Otherwise, if the rent surpasses the breakeven point, buying the property makes more financial sense.
4. Do mutual funds pay dividends?
Yes, some mutual funds pay dividends if the assets invested are in dividend-generating stocks.
5. Which is best real estate mutual funds in India?
The three best REIT mutual funds in India as of 2023 are -
1.Kotak International
2.PGIM India Global Select Real Estate Securities
3.Mahindra Manulife Asia Pacific REITs
6. Is there a real estate fund in India?
Real estate investment trusts or REIT mutual funds let investors invest in large scale real estate projects. There are multiple REIT mutual funds in India for investors to hop on.
