Mutual funds vs real estate: Which is better for long term investors? (2024)

According to investment experts, generally long term mutual funds investment gives at least 12 per cent return whereas real estate investment gives around 8 per cent return in long term. However, there is rental income involved in real estate that an investor can further invest in mutual funds SIP. So, if an investor don't want to invest in direct stock market he or she can think of investing in equity mutual funds or in real estate. But, in case, an investor has to choose either of them, then the situation might become tricky.

Speaking on mutual funds vs real estate investing; Pankaj Mathpal, MD & CEO at Optima Money Managers said, "If someone has surplus amount for investing, then from return perspective mutual funds are better option for long term investors as it yields around 12 per cent return in long-term or say for 15 or more years. However, in terms of real estate, annual yield that one can expect in long term would be around 8 per cent. Apart from this, there is ease of liquidity in mutual funds investment as one can liquidate one's money at just one digital click. But, in terms of real estate investment, liquidating one's investment would be slightly lengthy as it is more physical process than digital and there is no partial withdrawal in real estate investments."

Echoing with Pankaj Mathpal's views; Kumar Binit, Co-Founder & CEO at FinMapp said, "Real estate investment doesn't give power of compounding to an investor where an investor gets interest on interest. Managing mutual funds is much easier; once you've invested for a particular time period, you are only required to check it once in a while. In addition, mutual fund investing is now fully paperless, making it extremely convenient. There are several stages to managing your real estate investment after you purchase it."

However, SEBI registered tax and investment expert Jitendra Solanki said that real estate investment in commercial property can help an investor diversity one's portfolio provided the rental income is invested in mutual funds in SIP mode.

"Average annual rental on residential property after deduction in annual maintenance and various municipal tax payments would fall around 2.50 per cent per, whereas same would come around 8 per cent if it is a commercial property. So, if an investor invests ₹30 lakh in mutual funds, then after 15 years it would turned to around 1.65 crore at 12 per cent per annum. Similarly, ₹30 lakh would turn to around ₹95 lakh in real estate at 8 per cent annual gain (irrespective of residential or commercial property)."

Counting rental income from residential and commercial property form a ₹30 lakh real estate property; Jitendra Solanki said, "In the case of monthly rental income from residential property, it would fall around ₹6,250 [(2.5% of ₹30)/12] whereas it would jump to near ₹20,000 [(8% of ₹30 lakh)/12] in the case of commercial property. So, if an investor invests ₹30 lakh in commercial property, then its monthly rental income would be ₹20,000. If this ₹20,000 is invested in monthly SIP, then after 15 years, it would accrue around ₹1 crore. So, total return on one's commercial real estate property would come around ₹1.95 crore against ₹1.65 crore from equity mutual fund in same period. Apart from this, the investor will have a diversified portfolio where partial withdrawal will be available through mutual funds and one time withdrawal from the real estate."

Jitendra Solanki said that much depends upon the choice of the investor, whether he or she is interested in diversified portfolio with mix of partial and one time withdrawal facility or simple investment option with maximum liquidity and ease of withdrawal and investment facility. For an investor interested in diversified portfolio, commercial real estate investment using rental income in mutual funds SIP is better, whereas one who wants ease in investment and withdrawal in one's investment, mutual funds investment would be a better option, said Solanki.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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Published: 27 Feb 2022, 09:38 AM IST