Most people have two main expectations when it comes to investments – the investments should be secure and grow so that their financial goals are met. The two major asset classes that stand out when keeping the capital safe are real estate investments and equity investments, especially mutual funds.
In this guide, we explore in detail the difference between real estate and mutual funds when it comes to investment, so that you as the reader can understand the pros and cons of each asset class and make a well-thought-over decision when it comes to investing your savings.
What is real estate investment?
Real estate investment is one where you buy, own, manage, rent, or sell immovable property. It can be anything from commercial, to residential to industrial. While the investment required for a real estate purchase is high, the appreciation value is comparatively higher, and one can earn income out of it in the form of rentals for generations. This is one of the most common forms of investment because it doubles for personal use and the value of the property increases over time. Note that when it comes to real estate, a person is not only the owner of the land but also anything that is permanently attached to it that can be natural or manmade. For instance, minerals, buildings, water bodies, trees, fences, gates, etc.
What are mutual funds?
These are investment vehicles that collect money from many investors and purchase a portfolio of securities, bonds, and stocks, etc. With mutual funds, an investor gets an exposure to invest in multiple assets than what they can actually buy or manage on his own. Mutual funds are managed by professionals and offer fund diversification, making it a popular investment option.
See also: Why is real estate the best asset class to invest in?
What are the pros and cons of investing in real estate and mutual funds?
To find out if you are investment-ready, you should understand the advantages and disadvantages of investing in real estate and mutual funds respectively.
Benefits of investing in real estate
Listed are some of the benefits of investing in real estate segment.
Passive income
Once you invest in a property, it will generate wealth for you by appreciating. If you buy the property to put on rent, then it will be a major source of revenue for you through rental income.
Security
Investing in real estate provides security as there is always a roof above your head literally. The value of this property is only going to increase going forward.
Influence rent and value of property
If you invest in real estate, unlike other asset classes, you will have control on your property, thereby giving you the freedom to influence its value and the income it generates. For instance, if in a certain location, a housing rent is in the range of Rs 30,000 for a 2 BHK, you can furnish your 2 BHK and command a rent of Rs 37,000 for a fully furnished rental home.
Tax benefits
The Income Tax of India gives home buyers various tax benefits when it comes to property – be it property tax, tax benefits on home loans, capital gains tax, etc.
Disadvantages of investing in real estate
Mentioned are some of the cons of investing in the real estate segment.
Expensive investment
The real estate investment involves high costs initially. One has to have the down payment ready which is not covered as part of the home loan. In fact, based on the down payment, one gets the home loan approved.
Illiquid asset
Real estate is an illiquid asset and cannot be converted into cash easily whenever you want. Even if you decide to sell your property, the entire process of finding a buyer who matches your price and making documents to executing the sale deed will take a minimum of three to six months.
Maintenance of property
Immovable properties have to be maintained and this requires money and time. In case you are staying in an apartment that you bought which is part of a housing society, you will have to pay maintenance charges. In case you have rented your apartment (which is part of the housing society), you will have to pay non-occupancy charges (applicable in some states).
Risks associated with the market
This is true for any asset that follows a cycle and is high in the market sometimes and sometimes hits rock bottom because of local market conditions.
Benefits of investing in mutual funds
Mentioned are the advantages of investing in mutual funds.
Not expensive to enter the segment
Mutual funds have a variety of schemes and are a low-entry-cost market where you can enter the segment by paying Rs 2,000 per month also. You can invest in a systematic investment plan (SIP) and consistently save.
Diversification
Investing in mutual funds ensures that the investor has access to many different assets that reduces risk.
Liquid asset
The mutual fund shares can be sold very quickly depending on the scheme you have invested in. So, these are very handy if there is an emergency need of money in the household.
Managed professionally
Mutual funds are managed by fund managers. This minimises the need for investors to manage their investments on a regular basis.
Disadvantages of investing in mutual funds
Some of the cons related to investing in mutual funds are mentioned below.
Market risk
Similar to other asset classes and investments in the stock market, mutual funds also get affected on the basis of the stock market. Like any investment in the stock market, mutual funds are subject to market volatility. Because of this, the performance of the fund will also vary.
Yearly expense payment
In mutual funds you have to pay yearly expense charges to manage your investments whereas this is not true in the case of a real estate investment.
How to decide if you want to invest in real estate or mutual funds?
When you want to decide between the two asset classes you should be mindful of a few important things as both are important investment options that will help in your personal financial growth. Evaluate on the following points:
Auspiciousness
Real estate in India has always been linked with auspiciousness, with people looking for an auspicious time to buy a property, considering Vastu Shastra while buying a property, and doing a puja when a property is bought, etc. On the other hand, mutual fund is seen just as another investment vehicle, with no one really doing a puja, etc., after investing in one.
Display of wealth
Secondly, real estate, for a long period now, is related with display of wealth – with more and more people opting for premium and luxurious properties. On the other hand, mutual funds are not linked with display of wealth. There is a chance that the financial status of a person is better known by the property in which he stays in, as in reality no one would know the mutual fund investments made by them.
How much risk can you tolerate?
Everyone has a risk-taking capacity when it comes to taking financial risk. This depends on tolerating market fluctuations and waiting to return to a stable investment environment. During times when external shocks occur, like the recent episode of President Trump and tariff moves, when the mutual funds’ NAVs went through major ups and downs, an investor with a large exposure to real estate is likely to have a smoother journey.
Liquid funds vs illiquid funds
If you are looking from a long-term perspective, real estate and mutual funds both are attractive. With real estate you have passive income that helps in building your wealth. However, with mutual funds you can easily liquidate your assets and get returns in a shorter time frame.
How much money do you have for investment?
Mutual fund investments can be done with low investments too, while real estate requires large initial investment. So, on the basis of the savings you have, you can choose the asset class you want to invest in.
How much control do you want to have?
There are people who like to control their investments because of the money that has been put in. In real estate, you have direct control on your investments whereas in mutual funds a fund manager manages your investments and has minimum to nil involvement from the investors.
How long can you wait with respect to investments?
If you are looking at building wealth from a long-term perspective such as retirement planning, real estate is a good choice as it offers appreciation and strong rental yields. For short-term plans such as buying real estate, funding education, etc., you can invest in mutual funds.
Housing.com POV
When it comes to investment security, one should aim to buy at least one property with an intent of it being a safe space. Even if it is for personal consumption, the property will appreciate and contribute in long-term goals. On the other hand, mutual funds are one of the best investment vehicles to start off as you can start small by doing SIPs and grow to a level that you can eventually redeem it and use that money to buy a property. You can also choose a mid-path by investing in REITs – which are funds that invest in real estate spaces. Finally, remember it is prudent to have a portfolio with investments across all assets and not depend financially on one single asset class.
