Mutual fund vs. real estate: which is a better investment?
Here are some of the points which guide about mutual fund vs. real estate: which is a better investment:
When it comes to investments, real estate happens to be the favourite asset class of the investors. On the contrary, mutual funds tend to be the least preferred haven. This psyche prevails in spite of the fact that both the asset classes fall in the same risk category. People simply don’t buy the idea that they may lose money in real estate. They have developed a high level of comfort with this asset class. You may have observed some obsession Indians have with this category.
Conversely, if you elicit opinions about Mutual Funds, investors just shy away. There is a certain degree of fear surrounding Mutual Fund investing. So much so that although most of them would have heard about it, they just don’t want to take a leap. They are so much confident that they are surely going to lose money in this avenue.
All in all, you may find a perceptual bias among the investors towards real estate. This state of mind is reflected in the macroeconomic indicators as well. A recent study by Ernst & Young revealed that among all the asset classes, mutual funds constituted only 3.4% of the total investments. As opposed to this, investment in tangible assets including real estate was as high as 23%.
Some reasons can be attributed to this polarisation towards real estate investments. Firstly, the investor got the feeling of possessing an asset in a tangible form. Such a satisfaction couldn’t be derived from mutual funds. Secondly, the parallel economy has fuelled the demand for real estate since long back. Earlier, using real estate, investors got an opportunity to park millions of black money without the need to reveal the source of income.
The financial year 2016-17 has been action-packed as regards real estate. Two major events caused the things to take a U-turn. The first event was the Demonetisation of 500 & 1000 rupee notes. It sucked liquidity from the hands of individuals, especially the black money hoarders. It resulted in fall in demand for real estate investments. Consequently, the sky-high prices stabilised to a large extent. The second event relates to the changes announced in Budget 2017. As opposed to the prior unlimited write-offs, the loss from the second home was capped to Rs 2 lakh for a particular assessment year. Moreover, the unadjusted losses could be carried forward for only 8 assessment years. It led to fall in demand for house property among second home buyers.
You need to know that both the real estate and mutual funds hold the similar growth potential. Ideally, return generating a capacity of both the avenues tend to be affected by the state of the economy. It means that during the boom period, both tend to give sky-high returns and during bearish phases, one may notice considerable erosion of returns.
A continued perceptual bias against mutual funds may thus prevent you from enjoying a comparable return on investment. Time has come to wake up and smell the coffee.
Read on to get the real picture.
What makes you lose in Mutual Funds vis-à-vis Real Estate?
Even though both the mutual funds and real estate fall in the same risk-return category, it would be insightful to know why one usually loses in the former.
1. Greed & Fear
Usually greed and fear might have influenced your investment decisions. It may cause you to enter/exit at the wrong time. The low liquidity in real estate can be one of the reasons which prevent you from the exit as per your discretion.
Let’s talk about mutual funds now. Thanks to high liquidity, you simply start freaking out as per the market movements. The moment you lose composure, you commit the blunder. When the market is fairly valued, and the prices rise, you start buying. As soon as you witness a slump, you cannot resist redeeming your investments. Even at a loss for that matter. By doing this, you erode the earning capacity of your investments.
2. Difficulty in understanding
Before finalising any investment decision, you need to have information about parameters. Moreover, you should be able to make sense and use the information to your advantage. As regards real estate, it has always been the talk of the town. Whether it’s gatherings or formal meetings, people have the sq ft rates on their fingertips. There’s a lot of word of mouth publicity as it’s a conventional investment haven.
But mutual funds seem to be a relatively new investment haven. You may not have the same level of comfort with NAVs like you have with sq ft rates. The same predicament is faced as regards the qualitative and quantitative analysis. There may be times when you are unable to interpret the financial ratios correctly. Whatever be the case, the result is a failure in mutual fund investing.
3. Ticket Size
Ticket Size would mean quantum of investments going in with each contribution. In the case of real estate, the ticket size happens to be substantially large. Whenever you need to buy a plot or a house property, you need to shell out lakhs or even crores of rupees.
However, now take the case of mutual fund investments. The investment can be started with Sips as small as Rs 500. Moreover, you may never think of stepping-up the investments corresponding to increase in your salary. Ultimately, your returns also tend to fall in the similar range.
Also read: Sip vs lumpsum investment
4. Risk Perception
People perceive real estate investments to be a safe bet. On the other hand, mutual funds have always been associated with risk of losing money. But as a prudent investor, you need to know that real estate returns are as much affected by an economic downturn as mutual fund returns. A general misconception that real estate always appreciates needs to be corrected. You may recall the slump of 2008 wherein real estate depreciated like anything. It’s all about the externalities. Both the investment havens are placed on equal footing as far as risk is concerned.
Key Takeaways to maximise your returns in Mutual Funds
1. Buy low sell high. When markets are falling, don’t be in a hurry to redeem unless you really need the money.
2. Step-up your investments as your income increases.
3. Select appropriate mutual funds after an in-depth quantitative & qualitative analysis.
4. When you can afford a big ticket size, then don’t be frugal with your SIPs. The bigger, the better.
Mutual Funds investments are meant for everyone. These are available for a range of risk profiles. The investment discipline and tax-efficiency enjoyed in Mutual Funds can’t be thought of real estate. So, you may very well consider mutual funds as a convenient means to your financial ends.