Mutual Funds Vs Real Estate Investing – How to make the better choice?
Investment is one of the easiest ways of generating a passive income, provided you have the basic knowledge of investing and an understanding of what works best for you. Investing in real estate or mutual funds is primarily a personal choice that can depend on your current financial situation, goals, and investment strategy. But still, we can say that the number of people investing in mutual funds is generally higher than real estate, this could be so because mutual fund investment is comparatively more affordable than real estate. And so if you are planning to make a real estate investment, you might have to set aside a large sum of money for a long time before you can invest.
But that doesn’t mean that the number of people investing in real estate is any less, as for a very long time people have associated real estate property, generally land and houses, as a good investment towards the future, and people can also invest all of their lifelong savings into purchasing a piece of land or property.
Real Estate Investment
Any property that you buy or invest in is called real estate. Now, while both mutual funds and real estate are one of the best investment options in 2021, the basic difference between the two is that real estate can be used as an investment or also for personal use.
How To Invest In Real Estate
There are many ways in which you can invest in the best real estate out there, some of these are
- Property and Land Investments
This is the most common way of investing in real estate, where you directly purchase a real estate private or commercial property. You can either buy a property and rent it out to a company or individual. Or another option is to hold the property until it appreciates and then sell it for a higher profit.
You can also invest in real estate by purchasing the stocks of real estate companies. This may not be a direct investment in real estate as you are investing in a property but they can be very profitable.
Real Estate Investment Trusts are companies that own commercial real estate spaces. When customers invest in REITs their investments are pooled to fund the real estate company.
- Real Estate Crowdfunding
Real estate crowdfunding is a type of crowdfunding investment where a group of investors pools their assets to fund real estate projects.
Why invest in real estate?
Some benefits of investing in real estate are
- Easier to understand
Most investments including Mutual funds rely upon algorithms and other abstract concepts to generate profits, these concepts can be very difficult to understand. In real estate, you purchase a physical property that is much easier to comprehend. Also, most people are very familiar with purchasing and selling property and find them reliable.
The success of stocks and mutual funds depends on various factors such as the company you are investing in, corporate success, etc. but in the case of real estate, they are always directly under your control, with good management of tenants, investments, and maintenance, you can easily improve the value of your product.
- A Hedge against Inflation
Like gold, real estate always reacts proportionately to inflation. As inflation rises the prices of the property also rise. And so inflation will only mean appreciation of your property
- Can be easily financed or leveraged
Real estate purchases can be structured in safe and affordable ways by giving smaller initial investments or paying the amount you are comfortable with. And the result of this purchase is a tangible asset that appreciates over the years.
Risks in Real Estates
Some downsides of investing in real estate are
- High transaction costs
While mutual funds can be purchased for a price as low as Rs. 100 per month, real estate requires very large investments. Sometimes these can be difficult to pay off even in installments.
- Low Liquidity
Real estate investment, in comparison to some funds, is very illiquid. This may be so because properties are not very easy to sell off, therefore a real estate investor cannot get rid of their properties on very short notices.
- Maintenance required
When you buy a tangible property, you have to take care of its maintenance and management which can be really cost-consuming.
While this is true if you invest in real estate through crowdfunding platforms like Assetmonk. You will not have to deal with the hassles of asset management and maintenance as we take the load off you.
In mutual funds, a mutual fund company pools assets from many investors, to invest them in different securities like stocks, bonds, and short-term debts. Mutual Funds investment is one of the most famous investment options in the market for both short-term and long-term investments. Most first-time investors also like to start their journey by investing in Mutual Funds. But since no two investors are the same, each investor needs to weigh down the pros and cons depending on their investment style.
Types of Mutual Funds
Mutual funds are divided into many categories based on different factors such as risks, structure, asset class, and investment objectives. But the most popular mutual funds are
- Equity Funds
These are the funds that invest in equity stocks and shares of a company. They are considered high-risk investment options but at the same time, they also give very high returns. They can also include fast-moving consumer goods and infrastructure.
- Debt Funds
As its name suggests, a debt fund invests in debt instruments like company debentures, government bonds, or any other fixed-income assets.
These are considered safer and also provide fixed returns.
- Money Market Funds
These funds invest in liquid instruments, MMFs are considered very safe because they only make high-quality short-term investments. These are good for people looking for moderate to high returns with lower risks.
- Index Funds
When you invest in index funds, you are investing in instruments that represent a particular index only.
- Fund of funds
These are the funds that invest in other mutual funds and you earn returns based on the profit earned by the target funds.
Advantages of Mutual Funds
If you are planning to invest in any mutual fund, here are some benefits of mutual funds that you will get.
Liquidity is the ability to convert an asset into liquid cash at any time, this is the money that you can easily withdraw at any given time. Mutual fund investments are highly liquid assets, and they are much easier to convert into cash than real estate.
- Professional management
Each mutual fund has a team of fund managers and market analysts to manage your assets and make sure that they gain profit. This saves the investor’s time and energy and they don’t have to go into the deep details of market algorithms etc.
- Smaller investment option
Mutual funds can be purchased at very low costs, you can also invest in a systematic investment plan and make small investments every month instead of having to cut out a large amount of your income in a very small time.
- Easier to understand
As we have discussed above, mutual funds are managed by professional market analysts and fund managers who study the market regularly, so when you invest in mutual funds, you don’t need to have all the knowledge about a market. This makes mutual funds easier to invest in.
Disadvantages Mutual Funds
Some of the downsides of investing in mutual funds are
- Over diversification
Diversification is a tool that limits your losses by ensuring that you are investing in many funds at the same time. However, over-diversification can also lead to dilution of your returns.
- Charges and rents
A small portion of the investment you make goes to the salary of your fund manager and market analyst. Also, you have to pay an entry load when you join mutual funds and if you would like to pull your money out before time, you might have to pay compensation as well. But in real estate, you can directly invest without a middleman and sell your property at your own will.
- Fluctuation of fund performance
Since most mutual funds directly invest in equity, even after diversification, the value of your mutual fund can depreciate over some time. Because this kind of fluctuation is directly proportional to market trends, if the market falls, your funds can depreciate as well.
How to decide what’s better for you?
Is real estate a good investment? Or are mutual funds better? Here are some quick points that you can address to make an informed decision.
- Your capital
The minimum capital you will need to invest in real estate, especially land and property can be in lakhs and even crores for that matter. But if you go for mutual funds you can even start your investment journey with Rs. 1000 per month.
So real estate can be a very cost-efficient investment in comparison to real estate.
- Market Liquidity
The liquidity of the asset you are investing in is also very important. Real estate properties are very easy to sell as they are always in demand, but sometimes due to the location of the property or the market situation, the turnaround time for the selling of property can vary from what you had expected. At the same time, high-risk mutual funds which are known for giving the best returns can also take very sharp dips and result in losses.
- Your personal goals
Finally, your personal goal and investment objectives also matter. Having a clear vision of what you want will prove helpful, as then you can decide where to invest and for how long.
In real estate, the prices of property may vary from location to location.
Finally, when it comes to investment, both mutual funds and real estate belong to the growth asset categories, and both involve risk. Also, different people have different investment styles and strategies they feel most comfortable with. This means it is better to weigh out the advantages and disadvantages and then make a choice and don’t run from something you’ve never done before.
No investment can ever be completely wrong, a good investment is always the one that makes you feel safe and secure and a bad one does not suit you at all. There are many investment platforms that can be approached to give the best investment experience.
Assetmonk is a fast-growing real estate platform offering some of India’s best crowdfunding opportunities, not just that, we also offer an IRR of 14-21% on our properties. The company aims at providing the best investment options customized to match the style and needs of the investor.
Mutual Funds Vs Real Estate Investing FAQ's:
Investments in real estate have always been considered more reliable and beneficial in the long run, Assetmonk is the one real estate investment platform that has given even higher returns than mutual funds.
No, mutual funds are not a form of real estate investment, but there is one category of mutual funds, the REMF (Real Estate Mutual Funds) through which you can invest in real estate. REMF invests in shares of real estate companies.
Yes, the year is said to have great potential for commercial and private real estate selling and buying. Moreover Many foreign companies have started investing in India, which means the demand for commercial real estate will rise, so renting out property can be beneficial.
The average return of real estate from the ten most popular cities in the last ten years has been approximately 11.6%.
Depending on the tenure of your investment you can invest for the long-term in growth stocks, real estate, stock funds, gold bonds, and equity. And for the short-term, you can rely on savings accounts, large-cap mutual funds, treasury securities, and money-market funds.