Real Estate vs Mutual Funds – Which is a Better Investment?

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Investment is most intelligent when it is most businesslike – Benjamin Graham.

Which is the best investment in the world? It must be the one that gives the highest returns. Or is it that asset that has zero risk and is highly safe? The debate rages on endlessly, and people are divided in their opinions.

But there seems to be a contradiction here. An asset that delivers the highest returns may be highly risky, while the safest asset class typically gives very low returns. Very high returns cannot be sustained by any asset over the long term. If a stock has doubled (giving 100% returns) this year, it cannot go on doubling for the next ten years.

You obviously want both safety & high returns. It appears as if real estate is a rock-solid investment. But it is far easier to buy & sell mutual funds. What do you do?

Real Estate vs Mutual Funds is a Misnomer

It is an apple to orange comparison because both are different asset types with distinct characteristics. You can invest in one of them or choose both, depending on your objectives. But it would be wrong to choose one over the other.

You cannot classify real estate as excellent and mutual funds as bad or vice versa. Both have their own merits & demerits. It’s essential to clearly understand both asset classes and choose either or both or a combination of the two, i.e., real estate mutual funds.

Ultimately it’s about achieving your financial goals by making your money work for you.

Mutual Funds Simplify the Investment Process

People choose mutual funds for their simplicity & convenience. If you want to invest in stocks but cannot understand the intricacies of the stock market, then an equity mutual fund is the best solution. You also have debt funds which are an excellent alternative to FDs.

A professional fund manager picks a basket of stocks (or bonds) and manages the portfolio for a nominal fee. You can either invest a lump sum amount or take the systematic investment plan (SIP) route and invest as little as Rs.500 monthly.

Equity funds have various categories like large cap, mid & small cap, multi-cap, tax saving, and thematic funds. Debt funds are classified into liquid, short-term, long-term, credit risk, and dynamic bond funds. Debt funds provide FD-like returns but are more tax-efficient.

Hybrid or balanced funds invest in a mix of stocks & bonds to get the best of both worlds. International funds invest in foreign stocks, and you can take exposure to US, Europe & China markets.

So mutual funds offer you a wide variety of options. They are convenient, low cost, and strictly governed by SEBI regulations. Unlike property, it’s easy to buy & sell mutual funds. With a monthly investment of Rs.1,000, you can plan your retirement 30 years in the future.

The Land is Real, Tangible & Limited

Few people can escape the lure of land. You are not rich unless you are a landlord. It’s a strong belief that you can never go wrong with the property. That’s probably why land is called ‘real’ estate. Forget the rich. Even a poor family aspires to have a home of their own. Property gives you a sense of security and the pride of ownership.

But the problem is the price of real estate can be very unreal, especially in major cities of the world. While the population is burgeoning, the land is limited and cannot be manufactured. The issue gets serious in an overpopulated country like India.

Few fortunate souls who have inherited property have become millionaires today. The flip side of real estate is that the investment is not very liquid. You cannot buy & sell property overnight. The transaction costs like registration, stamp duty, legal fees & brokerage run into several lakhs.

If property records are not straight, it can leave you in a mesh of endless litigation. Cost of maintenance & taxes drills a big hole in your pocket too.

The Way Out for Investors

Can you reap the advantages of real estate while largely avoiding the problems associated with it?

Yes, you no longer need to buy land & property to benefit from them. If you do not have the resources to purchase and manage real estate, you can invest in Real Estate Mutual Funds in India.They are specialised funds that invest in securities of real estate companies. As the sector grows, these companies grow, and the rising stock price gives good returns on your investment.

Another emerging asset class that has caught the fancy of investors is the Real Estate Investment Trust (REIT). It is similar to mutual funds in operation. REITs raise money from the public and invest primarily in commercial properties like office spaces, malls, hotels & resorts. While mutual funds invest in securities, REIT is a trust that owns the underlying properties.

REIT Mutual Fund is a special fund that can directly invest in property or indirectly through the Real Estate Investment Trust (REIT).

REIT Mutual Funds in India are a boon to small investors who cannot afford to buy premium real estate directly. They offer a diversified portfolio and good liquidity to investors. Returns can be in the form of dividends & capital appreciation. Further, they are no hassles with buying & selling properties, litigation, maintenance, and paying property taxes.

Final Note

Real Estate or Mutual Funds? It is futile to waste time in comparison. The best investment is the one most suited to your situation, objectives & resources. A single asset class cannot perform at all times. A diversified portfolio with proper asset allocation is the cornerstone of investment success.

Do not look to make a quick buck everywhere. That amounts to speculation and not investment. Patience is key to getting the most out of any investment. Stocks, real estate, or REIT Mutual Funds – none are an exception to this basic rule. Remember the quote at the beginning. Invest using your intelligence and not emotions!