How real estate fared vs mutual funds

For a more liquid, tax-efficient portfolio, go for mutual funds

Real estate is among the favourite investment options for most people. In fact, it is a dream goal for many. Most people are happy and satisfied owning a physical asset that can be passed on to their children.

Hence, an investor ignores other better investment options like mutual funds. Let’s look at some facts and figure to understand how real estate as an asset class has performed as compared to mutual funds.

Real estate had a great run from the 1990s to 2008. Most people who talk about real estate giving great returns, are talking from their experience during this phase.

However, from 2009-2017, the average return across all cities in India has just been 7- 8 per cent per annum (as per the Real Estate Property Index data).

These returns barely surpass inflation and prove that capital appreciation in property is a myth.

Even within Mumbai city, the average return from property in prime locations is just 6.25 per cent per annum during the 2009-2017 period.

Another reason for buying real estate is rental income. However, over the past few years, the rental yields have been in the 3-4 per cent per annum range, excluding tax on the rental income and maintenance charges. Thus, real estate is not quite a viable investment option.

Now let’s look at the Indian equity market. People usually say that the equity market is very volatile and does not give good returns compared to real estate. But the average Sensex return between January 2009 and January 2018 was much higher at about 16 per cent per annum. Thus, an investor would have benefited much more by investing in the equity market compared to real estate.

Besides, there are other key points of difference between real estate and mutual funds

Real estate is a highly illiquid asset. You can face a lot of problems when you want to sell the property.

Problems range from not getting a satisfactory price to eviction of tenants or encroachers.

This may result in selling happening at a distress value.

In contrast, mutual funds can be easily liquidated (maximum three to four working days).

High investment

Investing in real estate requires a high investment amount. In comparison, you can invest as less as ₹500 in mutual funds. Further, you can invest regularly through systematic investment plans (SIPs).

Costs

Real estate has added costs such as stamp duty, registration, taxes and brokerage which add to the cost of property. Also, the cost of upkeep, renovation and society maintenance is relatively high. In contrast, mutual funds involve a smaller cost in the form of fund management charges, transaction charges and exit load (if any, on redemption).

Professional management

Mutual funds are highly regulated and managed by professional managers, backed by dedicated research teams. On the other hand, real estate is not a completely regulated market and market data such as market price, builder, project paperwork are not easily available.

Diversification

Diversification in real estate is almost zero due to the size of the investment. In mutual funds, one can easily diversify across different funds based on risk appetite. It is one of the key parameters for better returns.

One thing to learn from real estate investment is how people hang on for such a long period. If the same investment behaviour is replicated in mutual funds, one would end up earning much higher returns.

Hence, while one can have some portion of allocation into real estate (excluding residential property), it is always better to build a more liquid, tax efficient investment portfolio through mutual funds.

The writer is CFA, Founder & Chief Happiness Officer at HappynessFactory.in

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