For many people, investing over a long term horizon(>5 years) meant putting money in Real Estate. It is a tangible asset that is considered less risky. But that notion is highly debated now as the Equity market and Mutual Funds have given way higher returns than real estate. They are highly regulated by the government too. The top mutual funds have given returns of around 11-20% in the last few years.
Real Estate and Mutual Funds, both are good financial vehicles to invest your wealth in. They have different features, and so it becomes more of a comparison between apples and oranges. For you to know more about it, we have listed four reasons as to why options from the top mutual funds might be a good choice option for you:
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Investment Returns and Time Horizon
To achieve good returns in real estate, one has to keep invested for a long period(>5years at least), usually a period of 10-15 years. In mutual funds, one can get great returns in 3 to 5 years only. For a longer investment, the returns are even more.
Now consider the absolute returns for both the investment options.
In Real Estate, it would be roughly around 6-12% for a period of 5 years, depending on the location of the property or the house.
E.g. In Mumbai, the returns will be close to 12%, while in Kolkata it would be around 6%.
The returns from top mutual funds through SIP should vary anywhere between 12 to 23%, or even more for equity-based MFs(Large-Cap, Multi-Cap) for around 5 years.
Investment Capital
A large sum of money is required for a real estate investment. Hence most people give a certain sum of money as down payment and take a loan for the rest. The repayment of the loan includes interest on the principal amount, and the total payable amount becomes much more than the property’s initial cost when bought. Although some people earn rental income on the property, they still get stuck at earning around 7-10% this way, considering there is enough appreciation on the property value.
However, one can start investing in the top mutual funds for as low as INR 500 monthly for a specific duration, through Systematic Investment Plans. You have access to multiple top mutual fund schemes, and the opportunity to divest your portfolio with equity, debt and hybrid funds. There is also the facility to invest a lump sum amount at one go.
Ease of Investing and Liquidity
Tracking of Real Estate is not easy, as is with mutual funds. Mutual Funds offer investors a lot of ease in buying and redemption of units, tracking its performance, making switches, etc. Many apps and websites also offer a list of recommended top mutual funds based on their performance and in-house analytics. Such a detailed comparison and recommendation is rarely available for real estate transactions.
Liquidity is a big concern for real estate investments. It takes quite some time and paperwork to buy or sell a property or house. The market is not readily available. People in immediate need of money hence have to resort to personal loans or loans against property.
A good option hence is to go for top mutual funds, which have hardly any liquidity issues. There might be some exit and entry loads applicable for some Mutual Funds. It is advisable to go through the Scheme Information Document carefully before investing.
Tax Liabilities
Mutual funds are subject to taxes on the gains generated, short term or long term. However, there are certain tax-saving mutual funds(ELSS Funds) that are not taxed on the gains, and individuals can save income tax up to Rs. 1,50,000 per financial year under Section 80C of the Income Tax Act.
In Real Estate, taxes are calculated on the profit gained after Indexation, i.e. taking into account the inflation. But this tax relief is less than that given on mutual funds.
Overall, mutual funds do have additional benefits as an investment vehicle when compared with Real Estate, provided the market conditions are not drastic. In the long run, both these investments are favorable. It is good to have diversity in your portfolio so that you can utilize funds as necessary.