Real Estate Vs Mutual Funds: Meaning, Types and Key Differences

Mutual fund investments have the potential to generate around 12% returns over the long term, whereas real estate generally offers close to 8%. While this difference highlights the higher earning potential of mutual funds, the decision between investing in real estate and mutual funds should not be based only on returns. 

If you are wondering where to invest, learn the key differences between real estate vs mutual funds, their types and things to consider before investing.

Key Highlights

• Initial investment costs for real estate are usually higher than those for mutual funds.
• Mutual funds offer higher liquidity than real estate.
• You can invest in both real estate and mutual funds together.

Real Estate Vs Mutual Funds: Key Differences

Types of Real Estate Investments

1. Residential Property: Residential properties include houses, flats and villas, which you can purchase to rent out or sell later. You can earn rental income and appreciate the property value when you sell after a few years.
2. Commercial Property: Showrooms, shops and offices are examples of commercial property. Usually, the investment and rental income from these properties is higher than that from residential properties. 
3. Land: You can invest in land and sell it after a few years when the price appreciates. If you buy land in an area which develops significantly over the years, your income from the sale can be high. Notably, land does not provide regular rental income.
4. REITs (Real Estate Investment Trusts): You can invest in REITS through the stock market, earn rental income and property appreciation value. It eliminates the need to manage tenants or properties.

Types of Mutual Funds

1. Equity Mutual Funds: If you are an investor with a long-term investment horizon, you can invest in equity mutual funds. Usually, these funds entail high risks with potential for high returns.
2. Debt Mutual Funds: If you want to invest in instruments with stable returns, you can choose debt mutual funds. These funds usually invest in government and corporate bonds, ensuring safer returns.
3. Hybrid Funds: A hybrid fund invests in both equity and debt instruments. As a result, these funds entail moderate risks with moderate returns. If you are an investor planning to balance your risk, you can choose hybrid funds.
4. ELSS (Equity Linked Saving Scheme): If you invest in ELSS funds, you can avail tax deductions up to ₹1.5 lakh per financial year under Section 80C of the Income Tax Act. These funds are close-ended with a lock-in period of 3 years. 
5. Index Funds: An index fund reflects a market index such as the Sensex or the Nifty 50. If you want a passively managed fund at low cost with market-matching returns, you can invest in index funds.
6. Sectoral or Thematic Funds: The portfolio of sectoral or thematic funds includes stocks from a specific sector, such as pharma, infrastructure or IT or themes like ESG (Environmental, Social, Governance). If you have a high-risk appetite to get high returns, you can invest in these funds. 

How to Choose Between Real Estate vs Mutual Funds?

1. Investment Tenure: Determine the investment horizon to choose between real estate vs mutual funds. If you have a short-term investment horizon, choose mutual funds. In case you have a long-term investment horizon, you can choose both mutual funds and real estate.
2. Risk Appetite: If you have a low-risk appetite, you can choose real estate, as these are less volatile. Real estate prices depend on interest rates, market cycles and the location of the property. However, even though mutual funds, specifically equity mutual funds, are volatile, you can diversify and reduce your risks.
3. Liquidity: Mutual funds are highly liquid compared to real estate. You can redeem units of mutual funds anytime within 1 to 3 business days. However, selling real estate is time-consuming as it includes finding the right buyer at the right price.
4. Capital Requirements: Purchasing real estate can be cost-intensive as it includes mortgaging, insurance, taxes and maintenance costs. If you want to start investing with a minimum amount of ₹100 to ₹500, you can choose mutual fund SIPs (Systematic Investment Plan).
5. Maintenance: Maintenance of properties requires effort and the cost of repair. However, if you want an investment with professional management, you can choose mutual funds.
6. Income Generation and Capital Growth: Both mutual funds and real estate can offer regular income as well as capital appreciation. You can earn rental income and property appreciation value on sale from real estate. In the case of mutual funds, you can earn dividends and capital gains (on redemption).

Final Words

Choosing real estate vs mutual funds is a common thought among Indian investors. Both these investment options can provide high returns and capital appreciation in the long run. However, the returns depend on market performance (mutual funds), location of property and investment horizon.

If you want to earn stable returns with low risk, in the short run, you can invest with Stable Money. Stable Money-partnered banks offer up to 8.40% interest rate per annum on fixed deposits.

Download the Stable Money app now to open fixed deposits with DICGC insurance up to ₹5 lakh!