Investment options in India are plenty and real estate seems to be a favourite among Indians. However, mutual funds are now catching up among investors in the country. To be able to make a choice between the two, you must understand the differences between real estate and mutual funds.
Differences between Mutual Funds and Real Estate:
The difference between mutual funds and real estate can be understood by comparing the following factors:
Risk Factor – Real estate is a safer option than mutual fund. As mutual funds are linked to the market, a fall in Sensex prices could have a direct impact on your mutual funds. If the Sensex falls suddenly, your fund could also drop below the purchasing price of the fund, resulting in a loss. However, investments in real estate would not incur such losses and you will be able to recover the amount invested in the beginning with little profit.
Liquidity – Liquidity refers to the speed at which you can recover your money in case you want to sell off your property or redeem your mutual funds. Mutual funds offer higher liquidity as compared to real estate. Selling and redemption of mutual funds takes a maximum of up to seven working days, meanwhile selling off property could prove to be herculean at times. You may be required to wait for days to months to find a suitable buyer for your property.
Investment – Investing in mutual funds is a far simpler and uncomplicated process when compared to investing in real estate. If you are investing in mutual funds, you will be required to pay a monthly SIP (Systematic Investment Plan) in the form of an installment. The installment could be as low as Rs.2,000 and can be easily arranged to be deducted from your bank account every month until maturity of the fund.
Meanwhile, if you are investing in property, you would require a huge lump sum owing to the highly competitive real estate prices, ranging from lakhs to crores.
Gestation Period - Both real estate and mutual funds are considered to be long-term investments. In this regard, both seem to fare equally well. Just as mutual funds generate higher profits if forgotten for a few years, property purchase also proves worthwhile only if kept for a longer duration.
Mutual funds offer huge profits, allowing investors the opportunity to earn up to millions using the concept of compound interest. Although both types of investment exhibit the same nature, profits from mutual funds are far greater than from real estate.
Why is Real Estate Favoured More than Mutual Funds?
Investors in India have a preference for real estate investments over mutual funds, some of the reasons could be the following:
- Real estate is the only asset that can be largely funded by long-term debt, up to 75% provided by banks.
- Loan-funded real estate investment comes with tax benefits.
- Income of the spouse is also considered while applying for a home loan to avail additional tax benefits.
- It is considered easy money once invested, in the form of rental income.
- Real estate provides comfort that comes with investing in a hard asset.
- High return expectations from real estate, even though the asset is not valued on a daily basis.
Why do Investors Lack Confidence in Mutual Funds?
Some of the possible reasons for not being completely confident about mutual funds are:
- Inadequate knowledge of mutual funds and equity.
- Lack of understanding of the equity market, wealth building through SIP, and the power of compounding.
- Insufficient information about asset allocation, loss aversion and risk.
- Not understanding the difference between saving and investing.
- Lack of availability of loans for mutual fund investment.
- As this investment does not require a substantial amount to begin with, you may feel the returns incurred may not be substantial enough as well.
Both real estate and mutual funds are powerful investment options and you must understand your financial goal to be able to make a choice between the two. You cannot really compare the profits from both these types of investments as they depend on various factors that are relative. As the market trends seem to be volatile at all times, it is not an easy task to compare the returns of real estate and mutual funds. Plenty of research in investment options combined with a clear understanding of your financial requirement, along with the time frame desired by you, will help you make the best investment choice.
GST rate of 18% applicable for all financial services effective July 1, 2017.