Investing in real estate was once considered as a great investment option. However, over time, real estate has lost its charm with the rising cost. Also, investing in real estate comes with a lot of additional charges, such as registration and maintenance fees. This sometimes proves to be a burden and calls for choosing to invest in smart and efficient investment options. This is where mutual funds prove to be a better option.
Here are four reasons why mutual funds are a better investment than real estate:
1) Higher return potential
Mutual funds are capable of providing much higher returns than real estate. Particularly, equity funds can outperform the benchmark when the investment horizon is longer than five years. These funds can offer returns in the range of 12% to 15% a year. On the other hand, considering the prices in the nine largest Indian cities, real estate has returned an average of a mere 10% in the last 10 years.
The real estate sector has not seen a considerable extent of activities since March 2020. Also, many houses and flats in the major cities have been vacant as the corporates are insisting on adopting work from home facility to curb the spread of the novel coronavirus. Given the trend, the real estate sector is not expected to match the return potential of mutual funds any time soon.
2) Higher flexibility
Investing in mutual funds gives you a higher degree of flexibility. In case you have a large sum of Rs 1 lakh at your disposal, then you can invest this sum in mutual funds in two ways. One, you can invest the whole amount as a lump sum in one shot. Two, you can stagger your investment overtime via a systematic investment plan (SIP). You can invest Rs 10,000 a month through a monthly SIP.
You can invest even a sum as low as Rs 100 a month. To add to that, you can initiate or terminate your SIP at any time. This level of flexibility is not available with real estate investment. You are required to have a large sum of money to purchase a plot or house. Therefore, if you are looking to get started with your investment journey with small amounts, then mutual funds are the best and only option you have.
3) Higher liquidity
The units of a mutual fund scheme can be bought and sold at any time. Both the purchase and redemption of fund units are just a few clicks away. The whole process of mutual fund investments has been made seamless by the advent of technology. If you require money, you can quickly redeem your units to meet your needs. If you are not willing to sell your holdings, then you can avail a loan against them.
On the other hand, selling your real estate holdings can be a tricky task at times. You may not find the buyer who is willing to purchase your property at the price you desire. Also, the process is complex and involves a lot of paperwork. Therefore, if you want your investments to be quickly accessible and redeemable, then mutual funds are a far better option than real estate.
4) Negligible additional costs
The cost of investment attached to mutual funds is much lower than real estate. You pay an annual fee in the form of the expense ratio, which is no more than 2.25%, which is deducted from your overall corpus invested. Apart from the expense ratio, the other trading costs attached to mutual fund investments are stamp duty at 0.005% and securities transaction tax (STT) of a maximum of 0.1% on equity mutual funds.
On the other hand, purchasing a plot or house comes with registration and stamp duty charges, which is a huge sum. The stamp duty charges are a percentage of the property’s value; it varies across states and cities in India. It is in the range of 5% to 9%. Hence, the higher the value of the property, the higher will be the stamp duty. To add to that, you have to pay annual property tax. All these amounts to considerable expenses as compared to mutual funds.
Investing in real estate for profits is now a thing of the past. Smart investors choose to invest in mutual funds and enjoy higher degrees of flexibility and liquidity, along with avoiding unnecessary expenses.
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Engineer by qualification, financial writer by choice. I am always open to learning new things.