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Real estate or mutual funds: which one to choose for higher returns?



Any conversation about real estate investments invariably brings out big numbers. For example, you may have heard your colleague at the water cooler describing how he bought a property ten years ago for Rs. 20 lakh and its value has now gone up to Rs. 75 lakh. These numbers seem impressive. But, how does an investment in real estate compare to investments in mutual funds, if you are seeking higher returns?

Real estate vs mutual funds

Let’s compare both these investment channels on five important categories to find out which of them can be a better option for you.

a)      Returns

Location plays a significantrole in the returns you earn in the real estate sector. For instance, the average returns on a property in Mumbai are invariably higher than what you would make on a property in a smaller city. However, the average returns have roughly been around 8-11% over 5 years and 10-15% over ten years according to a report by Livemint.In comparison, you can earn anywhere between 18-20% on investments in equity mutual funds over ten years.

Taking the above example, if you purchased a property ten years ago for Rs. 20 lakh and it has now grown to Rs. 75 lakh, the total return on your investment is 14.13%. However, if you had invested the same amount in Franklin India Prima Fund 10 years ago, you would have earned Rs. 1.11 crore at 22.18%.

b)     Risk exposure

The real estate sector and mutual funds come with their own set of risks, but there’s one common link between the two investment channels. The performance of these two avenues depends on the overall performance of the economy. However, mutual funds are less risky than real estate investments because of diversification.

In mutual funds, investors have the option to invest in different asset classes to reduce risk. So even if one particular stock or sector underperforms, the overall portfolio performance can be balanced out by other sectors. This feature is not available in real estate investments.

c)      Investment options

When you invest in equity-oriented mutual funds, you have multiple options to choose from based on your investment goals and risk appetite. For example, you can select between large-cap funds, mid-cap funds, small-cap funds and Equity Linked Savings Scheme (ELSS) funds.Large-cap funds offer relatively lower returns but they are considered quite safe. On the other hand, small-cap funds may be riskier, but they offer higher returns to investors. However, real estate investments do not provide such variation in risk and returns on investment.

d)     Liquidity

Equity funds are liquid because you have the option to sell the fund and redeem your money any time you want. This can be useful in times of emergencies or if the fund underperforms. Only ELSS funds have a lock-in period of 3 years. In contrast, real estate investments are not very liquid. For example, it can be quite challengingto liquidate your assets if you need funds at short notice. You may not find a buyer quickly,and even if you do, you may end up with a poor deal on the sale.

Conclusion

Based on the above parameters, mutual funds score higher than real estate investments. That said, mutual funds and real estate investments are two starkly different investment avenues. And as an investor, you don’t have to choose between the two of them. You can have both mutual funds and real estate as part of your investment portfolio to meet different financial goals. However, if you are a salaried employee interested in high returns,witha limited amount for investments, equity mutual funds are the way forward. They are easy to invest and offer high returns over the long term.
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