What is Real Estate Investment?
Real Estate investment refers to the purchase of land, flat, buildings, houses or any kind of physical property. A good number of the population believes that real estate investment is the best investment option for long term investment horizon. The demand for real estate property is growing rapidly owing to exponential population growth.
Also, investment in real estate is considered to be less risky by many, as the underlying asset is tangible and past year returns have shown immense growth of the principal investment.
What is a Mutual Fund Investment?
Mutual Funds collect money from numerous investors and invests the total assets in various financial instruments to generate returns. These financial instruments include equities, debt securities, money market instruments, etc.
Based on their allocation to different asset classes, mutual funds are classified broadly into three categories, Equity Mutual Funds, Debt Funds and Hybrid Funds. People with high risk appetite can opt for equity funds, while investors with a conservative investment stance can choose debt or hybrid funds.
Difference Between Real Estate V/S Mutual Funds
Owing to massive returns on investment delivered by the aforementioned investment avenues, they are often compared. We compared the two investment options on different parameters, making it easier for you to pick the suitable option as per their financial goals and risk appetite.
1. Historical Returns
It is a general notion that real estate investment has shown substantial growth in the past years, with each year witnessing an exponential rise in the value of real estate property. This is true in majority of the cases, because of urbanisation around the country. For this reason, investors are convinced that investment in real estate is profitable in the long run, as it is quite certain that the worth of the invested property will grow.
But if the past year returns data is to be believed, it has been noticed that the returns from mutual fund investments are much higher than that in real estate for a fixed investment horizon. In the long run, market volatility gets balanced out and the capital market as a whole grows in value, thereby, increasing the value of the stocks of companies. This in turn, directly affects the returns generated by mutual funds that predominantly invest in equities.
Let’s take an example to understand this.
Suppose there are two investors A and B, the former investing in real estate and the latter investing in mutual funds. The table below lists the expected return rate with the final maturity amount:
|
Name of Investor |
Investment avenue | Investment amount | Expected rate of return in 5 years | Final Maturity Amount |
| A | Real Estate Property in Mumbai | ₹ 50 lakh | 12% | ₹88.11 lakh |
| B | Mirae Asset Emerging Bluechip Fund* | ₹ 50 lakh | 16.57% | ₹1.07 crore |
*Mirae Asset Emerging Bluechip Fund has been chosen for comparison as the fund has delivered consistent returns over the years, with its 5-year annualized returns being highest of all from the large-cap category, as of December 06, 2019. Also, large cap funds tend to be less risky than other equity funds.
2. Liquidity
One of the differentiating factors between real estate investment and mutual fund investment is liquidity. While the former is highly illiquid, the investment in the latter can be redeemed as and when the investor wishes. Sometimes, it may take years to liquidate your real estate investment if you’re not able to find the right buyer for your assets. Not only will you face a liquidity crisis, the whole process of selling the assets is quite cumbersome and time-consuming.
On the other hand, money invested in mutual funds can be redeemed with just a tap on your mobile screen. The ease of investing and withdrawing the final amount make mutual funds a better alternative to real estate investment.
3. Minimum Investment Amount
The value of the minimum investment amount in real estate and mutual funds differ by a huge margin. The purchase of the smallest of real estate assets currently requires a minimum of ₹20 lakh in metropolitan cities. Investing this huge amount in a single asset has a lot of risk exposure. If the area doesn’t develop as per the investor’s expectations, there’s a chance that s/he might lose the invested capital.
On the contrary, the Systematic Investment Plan (SIP) mode of investment in mutual funds allows an investor to invest an amount as low as ₹500. Even if an investor wants to make a lump-sum investment, the minimum value is not more ₹5,000. These low minimum value of investment makes it more preferable amongst individuals from low-income groups, and offers them an opportunity to earn substantial returns on their investment in the long run.
4. Regulatory Authority
Mutual Funds in India are regulated by the Securities and Exchange Board of India (SEBI). The regulatory authority ensures that proper guidelines are followed by the asset management companies, and investors’ interests are protected.
However, on the other hand, there is no regulating body for real estate investment. Cases of unethical builders indulging in fraudulent activities in this sector is also high. If a dispute arises for some reason, the matter goes directly to the court and might take years to get resolved. The time and money spent on dispute reduces the overall returns from investment.
5. Risk Exposure
The performance of both real estate and mutual funds is dependent on the economy of the country. So, in times of economic downturn, the risk of losing your invested capital is quite high for both investment avenues.
However, in the case of mutual funds, one can mitigate the market risk to an extent by diversifying their investment portfolio through investment in relatively secure funds such as debt funds or conservative hybrid funds. Returns from these funds are relatively less volatile than those from equity funds.
6. Taxation Policy
Investment in Equity Linked Savings Scheme (ELSS), a type of mutual fund scheme, offers tax-saving benefits to investors under Section 80(C) of the Income Tax Act. Investment upto ₹1.5 lakh is deductible from taxable income for a financial year. Although, the lock-in period to avail the tax benefit is 3 years.
Real Estate owners have to pay property tax to the municipal corporation or local government. This is an extra expense incurred by real estate investors. Apart from the property tax payable annually, the profit generated from selling a real estate asset is also taxable. However, one does get the indexation benefit while calculating tax on the profit. If the proceeds from the sale of real estate are reinvested entirely, the seller is exempted from paying any tax under Section 54 of the IT Act.
Real Estate Mutual Funds
If you’re looking for investment options that inculcate the benefits of both real estate and mutual fund investment, you can opt for Real Estate Mutual Funds (REMF).
These funds predominantly invest in securities offered by public real estate companies. These include commercial and corporate properties, raw lands, agricultural areas and apartment complexes. REMFs make it possible for investors with low disposable income to invest in real estate at an affordable price.
REMFs also reduces the risk arising out of illegal activities carried out by property dealers, as the funds are regulated by SEBI.
Conclusively, it can be said that mutual fund investment is a better investment option than real estate investment owing to better returns, less risk, better regularization and tax-saving benefits.
Here is a List of Mutual Funds You can Consider to Invest In:
| Fund Name | Fund Assets (Cr) | 1 Year Return | 3 Year Return | 5 Year Return |
| Axis Bluechip Fund – Direct Plan | 8749 | 22% | 21% | 11% |
| Mirae Asset Tax Saver Fund – Direct Plan | 2671 | 18% | 20% | – |
| Axis Midcap Fund – Direct Plan | 3551 | 18% | 19% | 12% |
| Axis Bluechip Fund – Growth | 8749 | 21% | 19% | 10% |
| Axis Long Term Equity Fund – Direct Plan | 21492 | 18% | 18% | 12% |
| Invesco India Growth Opportunities Fund – Direct Plan | 1991 | 14% | 18% | 12% |
| Axis Midcap Fund – Growth | 3551 | 16% | 18% | 10% |
| Mirae Asset Tax Saver Fund – Regular Plan | 2671 | 16% | 18% | – |
| Mirae Asset Emerging Bluechip Fund – Growth | 8868 | 16% | 17% | 16% |
| Kotak India EQ Contra Fund – Direct Plan | 874 | 14% | 17% | 11% |
| Canara Robeco Bluechip Equity Fund – Direct Plan | 257 | 18% | 17% | 10% |
| HDFC Index Sensex – Direct Plan Growth | 399.64 | 18% | 17% | 9% |
| Nippon India Index Fund Sensex Plan – Direct Growth | 22.55 | 18% | 17% | 8% |
| Mirae Asset Large Cap Fund – Direct Growth | 13064.85 | 16% | 17% | 13% |
| Tata Index Sensex Direct Plan | 12.11 | 18% | 17% | 9% |
| Axis Small Cap Fund – Direct Plan | 1200 | 23% | 16% | 13% |
| IIFL Focused Equity Fund – Direct Plan | 446 | 29% | 16% | 12% |
| JM Multicap Fund – Direct Plan | 143 | 19% | 16% | 11% |
| Axis Long Term Equity Fund – Growth | 21492 | 17% | 16% | 11% |
| JM Tax Gain Fund – Direct Plan | 35 | 16% | 16% | 11% |
| Invesco India Growth Opportunities Fund – Growth | 1991 | 13% | 16% | 10% |
| Canara Robeco Bluechip Equity Fund – Regular Plan | 257 | 16% | 16% | 9% |
| Canara Robeco Equity Diversified – Direct Plan | 1581 | 14% | 16% | 9% |
| Canara Robeco Equity Diversified – Regular Plan | 1581 | 13% | 16% | 8% |
| DSP Equity Fund – Direct Plan | 2888 | 20% | 15% | 10% |
| JM Tax Gain Fund – Growth | 35 | 16% | 15% | 10% |
| Kotak India EQ Contra Fund – Growth | 874 | 12% | 15% | 9% |
| Mirae Asset Hybrid Equity Fund – Direct Growth | 2037.71 | 15% | 15% | NA |
| Tata Retirement Savings Fund Moderate Plan – Direct Growth | 1100.88 | 13% | 15% | 13% |
| Mirae Asset Emerging Bluechip Fund | 8,219 | 18.27% | 14.40% | 17.53% |
| Axis Small Cap Fund – Growth | 1200 | 21% | 14% | 12% |
| IIFL Focused Equity Fund – Growth | 446 | 27% | 14% | 11% |
| DSP Equity Fund – Regular Plan | 2888 | 19% | 14% | 9% |
| Aditya Birla Sun Life Tax Relief 96 – Direct Growth | 8912.66 | 9% | 14% | 12% |
| Invesco India Mid Cap Fund – Direct Plan | 621 | 6% | 13% | 11% |
| Invesco India Infrastructure Fund – Direct Plan | 41 | 12% | 13% | 7% |
| L&T India Large Cap Fund – Direct Growth | 493.11 | 16% | 13% | 8% |
| DSP Equity & Bond Fund – Direct Growth | 6360.93 | 17% | 12% | 11% |
| SBI Small Cap Fund | 2,704 | 8.33% | 11.28% | 17.04% |
| Canara Robeco Emerging Equities Fund | 5,235 | 10.38% | 11.25% | 13.89% |
| Tata Mid Cap Growth Fund – Regular Plan | 747 | 10% | 11% | 9% |
| Invesco India Infrastructure Fund – Growth | 41 | 10% | 11% | 6% |
| LIC MF Infrastructure Fund – Direct Plan | 55 | 15% | 11% | 5% |
| HDFC Index Sensex Fund – Growth | 399.64 | -2% | 11% | 8% |
| ICICI Prudential Equity & Debt Fund | 23,487 | 8.11% | 10.41% | 10.65% |
| ICICI Prudential Balanced Advantage Fund | 27,956 | 12.79% | 10.40% | 10.37% |
| LIC MF Infrastructure Fund – Growth | 55 | 13% | 10% | 4% |
| HDFC Hybrid Equity Fund | 21,087 | 9.44% | 9.50% | 10.22% |
| PGIM India Dynamic Bond Fund | 42 | 13.69% | 9.32% | 10.08% |
| SBI Magnum Medium Duration Fund | 1,942 | 11.77% | 9.31% | 9.80% |
| Kotak Asset Allocator Fund | 42 | 11.09% | 9.29% | 9.12% |
| Franklin India Dynamic Accrual Fund | 4,012 | 9.51% | 9% | 9.98% |
| DSP Natural Resources and New Energy Fund – Direct Plan | 380 | 0% | 9% | 11% |
| Kotak Emerging Equity Scheme | 4,960 | 11.35% | 8.38% | 12.89% |
| ICICI Prudential All Seasons Bond Fund | 2,816 | 11.28% | 8.24% | 9.91% |
| Aditya Birla Sun Life Balanced Advantage Fund | 2,689 | 9.99% | 8.20% | 9.46% |
| Nippon India Small Cap Fund (earlier Reliance Small Cap Fund) | 8,425 | -2.60% | 8.14% | 11.82% |
| DSP Natural Resources and New Energy Fund – Regular Plan | 380 | -1% | 8% | 11% |
| Motilal Oswal Multicap 35 Fund – Regular Growth | 13634.94 | -10% | 8% | 15% |
| ICICI Prudential Bluechip Fund – Growth | 22182.14 | -6% | 8% | 9% |
| Tata Retirement Savings Fund Moderate Plan – Regular Growth | 1100.88 | -8% | 8% | 12% |
| Axis Strategic Bond Fund | 1,188 | 8.32% | 7.68% | 9.11% |
| SBI Magnum MultiCap Fund | 7582.94 | -5% | 7% | 12% |
| L&T Tax Advantage Fund – Growth | 3420.69 | -13% | 7% | 9% |
| Aditya Birla Sun Life Tax Relief 96 – Growth | 8912.66 | -13% | 7% | 11% |
| L&T India Value Fund – Growth | 8404.03 | -13% | 6% | 11% |
| DSP Equity Opportunities Fund – Growth | 5720.56 | -8% | 6% | 10% |
| SBI Bluechip Fund – Growth | 22754.43 | -6% | 5% | 10% |
(Data as on Nov 10, 2019; Source: Value Research)
Frequently Asked Questions
Q.1: Can I invest in real estate through mutual funds?
Ans: Yes, of course you can invest in real estate through mutual funds by choosing to invest in Real Estate Mutual Funds (REMFs). These are mutual funds which invest in the securities of real estate companies. These schemes are especially designed for the investors who are willing to invest in real estate but are unable to invest directly. In that case, the investors can get exposure to the real estate sector through smaller contributions (as that in case of mutual funds) and earn good returns.
Q.2: Is investing in real estate safe?
Ans: No investment is entirely safe. The performance of real estate is dependent on the economy of the country. This implies that during economic downturns, the risk of losing your invested capital is quite high. If you compare it with mutual funds, real estate is riskier. In mutual funds, you can mitigate the risk involved by diversification and other strategies which is not available in case of real-estate. However, you can call real-estate a comparatively safer investment option which can be very profitable when invested in for a longer period of time.
Q.3: Who should invest in real estate?
Ans: Real estate investments are suitable for the following investors-
- Investors who are willing to invest for a long-term period (at least 5 years)
- Investors who are seeking investment options for passive income
- Real estate is also a good option for the ones engaged in retirement planning
- Investors with moderate to high risk appetite should invest in Real Estate for long-term profits
Q.4: Should I invest in stocks or real estate?
Ans: Both real estate and stocks come with their own share of risks as well as returns. You can extract long-term investment benefits from both of these investment mediums. It is observed that a lot of people prefer investing in stocks as their purchasing is not hard on pockets and the returns are pretty good. Real estate requires a substantial amount of money for purchasing property. But, there are many people for whom real estate is much more appealing, considering that it is a tangible asset which can be controlled. However, the choice between the two options is entirely dependent on the investor, their funds in hand, risk tolerance, investment goal and investment stance.
Q.5: Why should you invest in Real Estate?
Ans: If you want to invest in Real Estate but have a sceptic view of the same, here are some advantages of investing in Real Estate which may provide you clarity on why should you invest in this instrument-
- It is a comfortable investment option for middle class investors
- Rental income can serve as a medium of active monthly income
- Real estate has high tangible asset value
- It provides a sense of security and stability to the individuals
- It can also serve as a post-retirement financial aid
Q.6: What are the disadvantages of investing in Real estate?
Ans: some disadvantages of real estate investments are-
- Involves higher transaction costs which is comparatively very low in case of mutual funds or stocks
- Real estate investments have relatively low liquidity as properties cannot be easily sold without substantial loss in the value
- It requires regular maintenance and management
- Investors who have purchased rental property often face volatile economies and fluctuations in the value of the property