Real Estate vs Mutual Funds

Real Estate or Mutual Funds: Where do I invest?

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Investment is a lifelong objective of every Individual to meet needs that arise in future. This brings us to the question – “Where to Invest?”. Also, when investing our hard-earned savings, the first thing that comes to our mind is to earn a high rate of return while keeping the risk minimal. Hence, we come up with two suitable options i.e. Real Estate or Mutual Funds.

DEBATE BEGINS….. -| Real Estate vs Mutual Funds

Real Estate vs Mutual Funds

Traditionally people have relied on Real Estate as they lack knowledge in other asset classes specially those related to the Share Market. People feel that Real Estate being tangible, are less risky. Property prices also don’t fall drastically. They just correct over time (i.e. prices remain nearly constant over substantial amount of time). Also in absolute terms when they consider the change in property prices, they feel that the returns are huge. But this is a common misconception since they don’t consider the annual rate of return. To better explain this point let us understand with an example:-

A flat purchased in a metro city in India for 15 lacs in 2005 gets sold for 75 lacs in 2018. The gain of 60 lacs can look huge as compared to the principal amount invested but when the annual rate of return is considered it’s just 12.7% using the CAGR formula (Compound annual growth rate). Whereas the same amount invested in leading Equity Mutual Fund Schemes could have yielded an annual return of 18%-20% based on the risk appetite of the investor.

Formula to calculate the Rate of Return:

CAGR Formula

Where T = Investment time horizon or time period.

DIVERSIFICATION & SWITCHING

There are a wide variety of Mutual Fund Schemes to choose from as per the investor’s appetite. Also, this pool of schemes just keeps on growing with time. Diversification & switching among these different fund options is also a possibility. Whereas investing in Real Estate requires huge sums of money often involving debt financing. Due to the high amount of funds required to invest in a single property, it becomes practically impossible to achieve diversification in Real Estate Investment.

INVESTMENT SIZE

In the past people have managed to gain significantly by investing in land/plots but the same cannot be achieved now. Land being a limited resource has seen exponential increase in price which is beyond the scope for a common person to invest. Also investing in Residential Flats does not provide similar returns as that of land/plots. Residential Flats are sold by the Builders at a premium as they gain enormous amount of profits from the construction of flats. Here Mutual Fund investors gain as the minimum amount to invest in Mutual Fund Schemes is very less as compared to investing in Real Estate. Also in case of investing in Mutual Fund Schemes we do have the option to invest regularly variable sums of money at our own specified time interval and build up a big corpus over time.

IS LIQUIDITY A CONCERN?

Liquidity also plays a key role in deciding between the two options. Investment in Real Estate is highly illiquid. The Real Estate prices are also dependent on the demand & supply of inventory in a particular area. Whereas Mutual Funds are highly liquid and since they have a variety of schemes we can choose one based on our investment horizon. Also we can liquidate part of our investment in Mutual Fund Scheme which is not an option in-case of investing in Real Estate.

EASE OF ACCESS

Another drawback of investing in Real Estate is Management & Accessibility. With Digitization & advancement of Technology, Mutual Funds are easily accessible and managed from any part of the world with just the click of a mouse. The same cannot be achieved for Real Estate investments.

INTERESTED IN EFFECTIVE RETURNS

When deciding between Real Estate vs Mutual Funds, taxes play a huge role. Real Estate Investment attract either long term or short-term capital gain taxes based on the holding period. Whereas there are certain Equity Mutual Fund Schemes which have negligible taxes as compared to other asset classes.  Certain other charges also apply to Real Estate Investment such as Registration Charges, Stamp duty, etc. Real Estate Investments also incur considerable maintenance charges which increases as the property gets old. These high tax rates and other charges reduce the effective returns in case of Real Estate Investments as compared to investing in Mutual Fund Schemes.

BEWARE OF DISASTERS

REAL ESTATE OR MUTUAL FUNDS

Real Estate Investments are prone to damage due to natural calamities like Earthquakes or manmade disasters like Fire or Encroachments. Though these unfortunate events can be insured but buying an insurance incurs extra charges upfront.

TRANSPARECY IN PRICES

Real Estate prices might not be transparent. Past transaction data may always not be easily available. Whereas shares and bonds are actively traded in exchanges and the NAV of the Mutual Fund Schemes are computed on a regular basis.

WHICH IS BETTER REGULATED – REAL ESTATE OR MUTUAL FUNDS

Another important aspect from investor’s perspective is Regulations. There is a lack of effective regulations in Real Estate market. Despite the govt introducing RERA it will take time to be fully efficient to protect the rights of the investors. Whereas the Capital market is well regulated by SEBI and from time to time regulations are modified to prevent frauds.

CONCLUSION

Mutual Fund Investment emerges as the new Investment product for the new generation people who like to be dynamic like the share prices. With increase in literacy rate people are better able to understand the Financial products and appreciate them. Even though Mutual Fund Investment can be considered risky as compared to Real Estate Investment but over long time horizon they are definitely expected to yield better returns. So if you are still confused between the two, put your confusions to bed and invest fast before the prices rise.

Author: Sandeepan B. – Jr. Analyst

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