Real Estate vs Mutual Funds: Where Should You Invest?

real estate vs mutual funds

Real Estate vs Mutual Funds: Where Should You Invest?

Many of us are very comfortable with real estate as an asset class as we believe it is one of the less risky assets to own and offers comparatively highest return when compared to any other asset class. But let us re-think and view the same opinion in light of mutual funds from emerging markets such as India. Read on as we uncover why mutual fund is a better investment than real estate for the current and upcoming generation against Real estate.

People have personally seen real estate prices growing manifold. For example, a property bought for Rs 15 lakhs in 2000 has grown over 5x now at Rs 75 lakhs. To an investor, it might look phenomenal growth but it is really the same? Is real estate actually the best investment option against any asset class? Let us look at two most important parameters to establish the truth – returns and risk.

Returns in real estate vs. returns in mutual funds:

Let us take the earlier mentioned example where property price grew from Rs 15 lakhs in 2005 to Rs 75 Lakhs today. Let us mathematically check at what has been the annual growth rate for the property using compounded annual growth rate (CAGR) formula. We find the investment grew at 13.17% for the period Jan 2005 to Jan 2018. On the other hand, if we take a top 200 mutual fund offered by HDFC or any other Asset Management the company, investment of Rs 15 lakhs in 2005 can grow up to Rs 1.2- Rs 1.5 crore at a rate of 18-20% CAGR. Thus, in terms of returns, equity funds tend to give higher returns compared to real estate in the long term.

Risks in real estate vs. mutual funds:

We believe only an ignorant investor would claim that real estate is less risky than mutual funds. However, the fact is that both equity mutual funds and real estate belong to growth asset category and thus are equally risky.

Real estate vs MF 1

Let us compare the returns of Nifty50 vs. Nifty Realty (the proxy for real estate):

Nifty Realty index that comprises of ten real estates companies The Nifty Realty has returned around -9.52% annualized returns since inception in 2007.

Source: NSE, As of February 28, 2018

On the contrary, Nifty 50 has returned around 11.10% annualized returns since inception in 1996.

Nifty 50 Index:

Real estate vs MF 3

Source: NSE, As of February 28, 2018

Comparison of returns:Real estate vs MF 4

While it is crystal clear that mutual funds (active investing in equities) have remained the most sought-after financial instrument for a young crowd like you, let us quickly see why real estate was more suited to our parents. Typically there has been an age gap of 2-3 decades between parents and child. Thus, this takes us back to the era of 1970-1990s where parents typically invested in real estate. A couple of things that supported their investment in real estate back then are elucidated as under:

  1. Real estate prices (inflation adjusted) were considerably cheaper in the era
  2. Equity market as Investment Avenue was not well flourished
  3. The economy underwent multiple issues due to the closed nature of the economy that discarded foreign investments in India

Conclusion:

We believe, mutual funds yields have fair chances to beat inflation over an investment in real estate and provide adequate portfolio diversification option that further balance the risk-reward profile. Mutual funds are professionally managed funds which are an active investment in capital markets and with the considerable expertise of fund managers along with continuous monitoring, it is likely that the performance remains moderately high. Lastly, mutual funds also provide tax benefits and offer power of compounding for disciplined long-term investors. Thus, by all means, mutual funds are more suited to your generation as against real estate that was suited to parents.

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