In the world of finance, the quest for the ideal investment avenue often leads investors to compare mutual funds and real estate. Both offer promising prospects for long-term wealth accumulation, but each comes with its own set of considerations and potential benefits. In this comprehensive guide, we delve into the intricacies of investment in land vs. mutual funds, analyzing them across key parameters such as returns, liquidity, initial investment requirements, risk, and tax implications.
Real Estate Investment vs. Mutual Funds
Let’s look at some of the comparing points of real estate vs. mutual funds:
Returns
The pursuit of attractive returns is a cornerstone of any investment strategy. Over the past decade, mutual funds have consistently delivered compelling returns, with averages ranging between 12 percent. This performance underscores the potential of mutual funds to generate substantial wealth over time.
Real estate, meanwhile, has yielded an average return of around 8 percent during the same period, according to reports from reputable real estate research firms. While these figures provide a general overview, it's essential to note that returns may vary based on factors such as location, property type, and market conditions.
After looking at the returns aspect of real estate vs. mutual funds, let’s delve deeper into their liquidity.
How to Get Consistent Returns of Land Investment?
Investors often need clarification on investment in land vs. mutual funds. They are worried about the inconsistency of returns and on top of that, the barrier to entry is bigger as compared to mutual funds. In this scenario, Nimbus Agro Farms, a managed farmland provider, comes to the rescue. Nimbus offers three projects Nandi Farms Phase - I, Nandi Farms Phase - II, and Coconut Habitat Phase 1. The first two projects are spread across 13.2 acres and the third one is spanning 80 acres.
These managed farmlands offer world-class amenities and a guaranteed return of investment of 8 percent. Other than that, with the development on National Highway 544E in India, the corporate sector is booming, especially with the upcoming 3600-acre Tekulodu Corporate Zone. Property values in the area have soared by 300-700% in the last 5 years.
Liquidity
Liquidity plays a pivotal role in determining the accessibility of invested funds, especially during times of financial need. Mutual funds excel in this regard, offering high liquidity through the ability to redeem units swiftly with just a few clicks. Investors can expect to receive their funds within a matter of days, providing flexibility and peace of mind.
Conversely, real estate investments lack such immediacy. Selling a property can be a time-consuming process, often taking months to finalize a transaction. Moreover, the need to sell the entire property, even for smaller financial requirements, highlights the inherent illiquidity of real estate investments. It is absolutely clear in real estate investment vs. mutual funds that mutual funds are more liquid.
Power of Compounding
Kumar Binit, Co-Founder & CEO at FinMapp, highlights the power of compounding as a key advantage of mutual funds. Unlike real estate, mutual funds allow investors to benefit from the compounding effect, where interest earned on investments is reinvested to generate further returns.
Initial Investment Requirements
The barrier to entry is a crucial consideration for investors, particularly those with limited capital. Mutual funds offer a low threshold for investment, allowing individuals to start with modest amounts. Through systematic investment plans (SIPs), investors can initiate their journey with sums as small as Rs 500, gradually increasing their exposure over time.
In contrast, real estate demands substantial financial commitments, with properties in prime locations commanding hefty price tags. Even with the option of home loans, significant down payments and additional costs are often required, making real estate inaccessible to many aspiring investors.
Risk
Mitigating risk is paramount for prudent investors seeking long-term wealth preservation. Here’s an overview of risk in investment in land vs. mutual funds:
- Mutual funds utilize diversification to manage risk by spreading investments across a basket of stocks and securities.
- Diversification helps cushion the impact of individual company performance, reducing overall portfolio volatility.
- Real estate investments carry their risks, including depreciation in property values during economic downturns.
- Illiquidity of real estate assets exacerbates risk, making it challenging to liquidate holdings swiftly during financial distress.
- Maintenance expenses, property taxes, and market fluctuations further contribute to the risk profile of real estate investments.
Tax Implications
Tax efficiency can significantly impact the net returns realized by investors. In mutual funds, tax implications vary based on investment duration and asset class. Equity mutual funds attract a long-term capital gains tax of 10 percent on gains exceeding Rs 1 lakh in a financial year, offering tax-efficient avenues for wealth accumulation.
On the other hand, debt mutual funds, are subject to different tax treatments, with indexation benefits available for returns held over three years. Real estate investments also carry tax implications, including taxes on rental income, capital gains, and stamp duty. While certain tax deductions are available for home loan interest and principal amounts, the overall tax landscape for real estate investments may not be as favorable as that of mutual funds.
Expert Perspectives
Pankaj Mathpal, MD & CEO at Optima Money Managers, emphasizes the surplus returns offered by mutual funds, particularly for investors with long-term investment horizons. Kumar Binit highlights the convenience of paperless transactions and simplified management processes in mutual fund investing. SEBI registered tax and investment expert Jitendra Solanki presents an alternative perspective, advocating for real estate investment in commercial properties.
Figures of Investment in Land vs. Mutual Funds
According to Jitendra Solanki, investing ₹30 lakh in mutual funds over 15 years can potentially yield around ₹1.65 crore at a 12 percent annual return. In comparison, the same amount invested in real estate may turn into approximately ₹95 lakh at an 8 percent annual gain. Furthermore, considering rental income from commercial properties, monthly rental income from a ₹30 lakh commercial property could be around ₹20,000. If this amount is invested in mutual funds through SIPs, it could accumulate to approximately ₹1 crore over 15 years, resulting in a total return of around ₹1.95 crore.
Here's the information about investing in real estate vs. mutual funds in India:
Final Words - Investing in Real Estate vs. Mutual Funds in India
Both mutual funds and real estate present compelling opportunities for long-term investment growth. However, the choice between the two ultimately depends on individual preferences, financial goals, and risk tolerance levels. While mutual funds offer advantages such as higher liquidity, lower initial investment requirements, and tax efficiency, real estate investments provide the potential for asset appreciation and diversification. As investors navigate the complex terrain of financial markets, a balanced approach that incorporates both asset classes may offer the optimal path to long-term wealth creation and financial security.
