Mutual Funds or Real Estate – A Comparison

Many of us are very comfortable with real estate as an asset class. Real estate is tangible and we feel we have full control on it. Most of us believe it to be less risky and think the return is highest and unmatched by any other asset class. The returns are unmatchable by other class,

Thousands have personally seen their real estate investments grow manifold.  A Rs 100 lacs property bought in Adyar, ( Chennai )  in 2008 is probably priced at Rs 2.13 Crore today. Is it not phenomenal?

What is the fact? Is real estate actually the best or a mutual fund is a better option?

But have you considered as Mutual Funds as an asset generating superior returns? Read this to understand how MF’s can be a better investment than Real Estate.

We will broadly look at two parameters to establish the truth; Returns and risk.

Returns in Real Estate:

Let us take the earlier mentioned example. Property bought in 2008 at Rs 100 lacs is worth Rs 2.13 Crore today. Growth of Rs 113 lakhs in a matter of just 11 years, fantastic! Isn’t?

Ok, let us mathematically check at what rate it has grown. We know that bank deposits give – 7% per annum.

The property grew at the rate of 7% for the period Jan 2008 to Jan 2019. 


Now, assume one had invested Rs 100 lacs in IDFC Premier Equity Fund  G for the same period. He would have made Rs 5.41 Crore at a rate of 16.67%.

Even if one has invested in index funds, with the equity Long Term Average of 12.9% the returns would have been 3.8 Cr.

Diversified Equity funds tend to give higher returns compared to real estate in the long term. 

Liquidity

The purpose of any investment is to use it when you need it. When you stuck with any financial exigency, how soon you can convert that investment into real cash is liquidity.

Liquidity refers to the speed at which you can recover your money in case you want to sell your property or redeem your mutual funds.

Liquidity of equity mutual fund is very high. You can easily sell an equity Mutual funds in 4 Days.

When it comes to Real Estate, there are no transparency or standardisation of pricing in Real Estate it is even more difficult to arrive at a price which is acceptable for both buyer and seller.

Hence selling off the property with Right Price is always a challenge.

 

Is Regulation plays a  role ?

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 Mutual Funds & Equity Markets Regulations are Stringent and well regulated by SEBI and from time to time regulations are modified to prevent frauds.

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.

Conclusion

If you are a Seasoned Investor in Real Estate, then you can always rely on this Asset Class. Few of my clients invest, Re furnish and Sell their Real Estate Assets or they invest in commercial Spaces and get attractive Rentals and higher returns for their investment.

If you are a first time investor or investing in Real Estate for returns and rentals ( Or As Investment ) , then the money you invest in Real Estate should not exceed 30 – 40% of your Net worth. Because you will not get an optimal Returns and Liquidity for your Investment.

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 or consult your Wealth Consultant.

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