Mutual Funds Vs Real Estate : Which is a better option?

Published On: 08-May-2020

It is often said, “one should not put all his eggs in one basket.” Experts suggest investors must spread their investments across different asset classes, e.g., equity, debt, real estate, etc. Different asset classes have different risks and rewards associated with them, and it becomes crucial for the investors to balance the risk-reward trade-off to smoothen their investment journey. This article aims to compare investments in mutual funds and real estate on different investment considerations, to enable the investors to make an informed decision in this regard. 

Here is a comparison with respective to Mutual Funds v/s Real Estate.

  1. Quantum of Investment – Since property units are generally indivisible, a single real estate transaction requires high investment commitment initially. On the other hand, the investors may start investing in mutual funds at periodical intervals for an amount as low as Rs. 500 per month. Such periodical investments may be cancelled at any point in time in the future, which may be difficult concerning real estate investments. 

  2. The convenience of Investing – Considering the high commitment amount, one needs sufficient planning beforehand to invest in real estate. One may also opt for a housing loan and repay conveniently through equated monthly instalments (EMI) over a specified term. However, investing in mutual funds may be organised through Systematic Investment Plans (SIPs), which may help the investors make regular investments in specified mutual fund schemes. 

  3. Liquidity of Investments – Real estate investments may carry a significant disadvantage with them in terms of lower liquidity since the real estate units are not standardised and not easily divisible. On the other hand, mutual funds ensure the liquidity for their mutual fund schemes, as the redemption of mutual fund units is processed at the end of every working day and redemption proceeds are credited to investor bank account within 4-5 working days. In case of Equity Fund the amount credited within 4-5 working days & in case of debt funds the amount will be credited within 1-2 working days.   

  4. Investing Returns – The real estate returns may be in the form of capital appreciation and rental income. However, such investments also suffer from the changes in preference changes of the population, which may impact the demand and, consequently, the valuation as well. As such, the returns from real estate investments may vary with the locality, design, and structure of the real estate property. On the other hand, the mutual fund returns are dependent upon the performance of the underlying investment portfolio. 

  5. Maintenance Costs – Since real estate investments involve physical assets, such investments require regular maintenance, thereby adding to the monthly costs for such investments. On the other hand, mutual funds charge expenses to the scheme returns, which are regulated by SEBI. 

  6. Taxation – The rental income from house property under the income tax law is taxed after providing certain deductions including standard deduction. Further, the capital appreciation for such property is taxed at the applicable tax rates if it has been held for two years or less. For a higher holding period, the applicable tax rate is 20% after indexation benefit. On the other hand, the returns from equity oriented mutual fund schemes are taxed at 15%, if the investment has been held for 12 months or less and investments with extended holding period, the tax rate is 10% without any indexation benefit for gains exceeding Rs. 1 lakh in a financial year. 

Given the need for diversification within an investment portfolio, the investors may choose to invest across asset classes including real estate and mutual funds. However, the investors need to weigh all the available options and be genuine and sincere before making a substantial investment commitment in real estate.

Note: The tax rates as mentioned in the article are for illustrative purposes only and are updated as per the Finance Act 2020. The tax rates mentioned herein are also subject to applicable surcharge, if any, and higher education cess.

 The information herein is provided for general information only for the investors of the UTI Mutual Fund Schemes (Schemes). Investors should not treat the contents as any advice relating to legal, taxation, investment or any other matter and also In view of the individual nature of the implications, are strongly advised to consult their tax/legal consultant with respect to the tax implications arising out of their participation in the Schemes or otherwise. Investors are advised to read and understand the concerned Scheme Information Document, Statement of Additional Information and other relevant documents, as modified from time to time, prior to making any transaction.