Guide to Mutual Fund vs. Real Estate Investment

If you’re an Indian national reading this article, you would very well be aware of this scenario: You have some money that you have saved over time and you’re thinking of investing in a flat or a plot of land.

Well, we don’t blame you. Traditionally, the first choice for investors or beginners, advised by their parents/peers is to invest in property/real estate.

In modern times, investing wisely is of utmost importance which ultimately leads to a person’s attainment of financial goals and securing their future.

With people’s consumption patterns, needs, and demands changing, they have sought to invest in other options such as gold, stock, mutual funds, etc.

Mutual Funds are also one of the most popular investment choices that Indians prefer. So the question arises: Which one of them is better for investment purposes?

Before we proceed…

This article will not talk about your first property, because it is an essential human requirement for shelter, so capital appreciation, lease, and rental income are out of the equation.

But if you are looking to invest your money in a second property, it will be considered as an investment. This would be the primary basis of the study of our article: Real Estate vs Mutual Funds.

Okay, now that we have got this out of the way, let’s get started!

– Initial Investment

There is an obvious contrast between the amount which is needed to invest when we talk about real estate and mutual funds.

A normal person with a bank and a mutual fund account can start their investment journey digitally, all within the comfort of their home, and you can start investing in Mutual Funds through FinMapp!

You can start a SIP with an initial amount of INR 500 each month which won’t hit your pockets hard. On the other hand, the initial amount needed to invest in real estate is much higher, with additional amounts needed as well down the line.

– Degree of Risk

A saying that goes, “Bigger the stake, bigger the risk”, is somewhat true. In the modern era of investment, you can take this saying with a pinch of salt.

When it comes to investing in Equity Mutual Funds, you get maximum returns with a minimum amount of risks. This is achieved by the fund managers, who invest your money in a portfolio, which consists of different types of stocks.

As a result, you do carry a certain amount of risk, but it gets massively reduced over the long term.

-Expected Returns

Real Estate has shown a historical growth rate when it comes to returns, mainly due to urbanization. This is true for most cases, but it mainly depends upon the current economic situation.

As for investors, they mainly invest in real estate as they hold a belief that the value will increase over time. The returns generally range from 7% to 11%.

But if we talk about returns from mutual funds, their returns are comparatively higher than real estate and have also shown tendencies of providing inflation-beating returns. You can get returns of 14% to 19%, depending on the types of funds invested in.

-Tax exemptions

Tax saving mutual funds offer INR 1,50,000 a year under Section 80C of the IT Act. This helps you save up to INR 46,800 a year in taxes. Any amount you earn from your investments above INR 1 lacs is taxed as Long Term Capital Gain (LTCG) at a rate of 10% at maturity.

In the case of real estate investments, indexation can help you save money on taxes.
Property tax is paid to the municipal corporation or local government by property owners. This is an additional cost borne by real estate investors.

Aside from the regular property tax, the profit gained from the sale of a real estate asset is also taxable.

When calculating the tax on profits, however, the indexation benefit is available. By accounting for the impact of inflation on the value of your property, indexation can help you save money on taxes.

Section 54 of the IT Act exempts the seller from paying any tax if the revenues from the sale of real estate are wholly reinvested.

It should be emphasized, however, that real estate tax exemptions are lower than those granted by mutual funds.

-Liquidity

Investments in mutual funds are extremely liquid. Its units can be redeemed at any moment with a few taps/clicks, and the funds will be sent into the selected bank account within two to three business days.

Real estate, on the other hand, is a different story. Finding a buyer might take months, and in our haste to sell the house as fast as possible, we frequently fail to sell the house at a fair price.

Furthermore, even if the amount we require is less than the house’s value, we will have to sell the entire property to obtain the funds.

Bottom of the line:

We hope we were able to provide you with some valuable insights on Real Estate vs Mutual Funds.

When prices fall quickly and rental and loan rates converge, real estate could be an excellent investment in the future. When investing in mutual funds, however, one must be careful to invest with knowledge, adhere to asset allocation, and follow sound counsel.

Without any of these, investing in mutual funds could result in a terrible investment experience and a return that falls short of expectations.