Real Estate vs Mutual Funds – Which Is the Better Investment?

Investing your hard-earned money is the best way of utilising your money instead of just keeping it idle in the savings bank account or spending it on unnecessary things. Moreover, the avenues to invest one’s money have increased exponentially in the last few years. Some of the best investment tools in India are real estate and mutual funds.

Before you decide which investment option to choose between mutual funds and real estate, you must know the basic concept of both investment tools. The following content will help you make an informed decision as you will have an idea about the objectives and other factors of both investment options and check whether they match your requirements or not.

What Is a Mutual Fund?

Mutual funds pool money from a large number of investors, and the fund manager then allocates the collected money into multiple securities like bonds, stocks, or commodities in the market. The gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses. 

There are many types of mutual funds available in the Indian market. These types can depend on the portfolio’s objective, fund structure, management style, and underlying assets (equity or debt).

For instance, if an investor chooses to invest in equity mutual funds, the fund manager will invest the majority of the corpus in equity-related instruments such as stocks of top-performing companies.

In contrast, if an investor wants to invest in debt funds, then the fund manager will take the pooled money and invest a large portion in debt instruments. This includes corporate bonds, government securities and money market instruments.

What Is Real Estate Investment?

Investment in real estate involves investment in properties which can be residential or commercial. You can also use the property for your personal needs while you are investing in it. Real estate includes a plot of land and improvements made on it, like structures, buildings and utilities. It can include residential space, commercial space, an entire building or a single flat.

When comparing real estate investment vs mutual funds, the former allows you to use the property for your personal needs while investing in it. 

What Are Some Ways to Invest in Real Estate in India?

If you want to know which investment, property or mutual fund is a better choice, you need to know various ways to invest in real estate, and these include:

• Property and Land- This is the most common way for Indians to invest in real estate. People buy a plot of land or an apartment and then put it on rent or use it themselves. Then, after a few years, when the land/flat price increases, they sell it at a much higher price.

Sometimes people invest in commercial properties and rent them for commercial purposes. This way, they can earn revenue until they want to sell it.

• REIT- REIT refers to Real Estate Investment Trust. The trusts pool money from various investors and then utilise the funds to purchase commercial real estate spaces. As a result, the investors get returns at maturity, and these are derived from rent.

Risks of Investing in Real Estate 

Both mutual funds and real estate investments belong in the growth asset category. This means they both carry risks when you invest your money in them. However, there are some unique risks for real estate investments. 

Firstly, an economic slowdown can cause losses to such investments. You cannot diversify your portfolio while investing in real estate because a large sum of money is invested in one property. Here are some of the other risks involved in investing in real estate:

• Financial risks: Usually, people take loans from banks and NBFCs when they wish to invest their money in commercial or residential property. At times, they fail to pay back their debts on time, which puts a strain on their finances and also affects their credit score.
• Management risks: People often buy a property and put it on rent or use it themselves. However, if they fail to maintain the property till the time they sell it, they may not be able to earn returns from the property as expected.
• Liquidity risks: While selling real estate, sellers may take time to find the right buyer who will give them a fair price for selling the property. In some cases, investors fail to sell the property for a higher price than they had spent to purchase it. This can happen for many reasons, from economic slowdown to a fall in the prices of properties.
• Legislative risks: Often, the property is in a disputed area, and the local bodies have put up restrictions. An investor will have a very tough time selling the property. Regulations regarding real estate, including tenant laws, registration fees, restrictions on the use of property, etc., can also change unfavourably.

Risks of Investing in Mutual Funds

• Market risk: As we all know, mutual funds are subjected to market-related risks. These market-related risks can cause losses for the investor instead of making profits. Some components that affect a market’s conditions are recession, socio-political issues, natural disasters, etc. However, if the investor manages to diversify his/her portfolio, he can mitigate these risks.
• Liquid risk: Liquidity refers to the scenario when people cannot redeem their fund units without incurring a loss. Sometimes, investors even fail to find a buyer for their fund units. Furthermore, if you invest your money in ELSS, your money will be locked-in for three years.
• Credit risk: Credit risk happens when the issuer of a security cannot pay the outstanding debts, leading to lower returns than expected. Debt funds, especially ones that invest in debt securities with low credit ratings, carry credit risks.
• Interest rate risk: Interest rate risk is the probability of a decrease in the value of security from fluctuations in interest rates. Therefore, if there is an increase in interest rate, the price of securities will go down.
• Concentration risk: When one focuses investments in a particular sector or market cap. This way, one can get high returns, but they also carry huge risks. However, you can lessen concentration risk by diversifying your portfolio.

Real Estate vs Mutual Funds- A Brief Comparison

Final Word

If you wish to invest your surplus money in some form of investment tool in the market, you should evaluate all your options. Consider the information given above if you are confused between real estate vs mutual funds. Then, assess your risk tolerance and financial needs before investing your money.

Frequently Asked Questions