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What is a better investment? Investing in real estate or Mutual Funds?

Before we start, let’s consider what is an investment? A definition that I find useful is that an investment is buying something that you will one day sell to pay for expenses.

This article, therefore, does not refer to your buying the home in which you live. That purchase should not be considered an “investment”. The article only refers to purchase of real estate (land, property) as an investment.

Here are a few factors that should make you think while making your decision.

  1. Minimum investment size: You need Rs. 1000 to start investing in Mutual Funds. Real estate needs much more. Even if you have to make a down payment (10-20% advance) for an apartment, you would need a fairly big corpus which in a city like Bangalore is often upwards of Rs. 10 Lakhs.
  2. Recommended holding period: Both require a reasonable holding period of 5-10 years. This is usually easier to do for property as there is no daily price and you don’t feel worried. It’s also more difficult to exit your property investment, and hence it usually leads to longer holding periods - sometimes decades. However, if the same holding period was applied to mutual funds, the growth could be much higher.
  3. Quick access to money (liquidity): Given that the purpose of an investment is to get cash some time in the future, how easily you can do that is a key criterion. Let’s assume you have an apartment you feel is valued at Rs.50 lacs. You also have Mutual Fund units valued at 50 lacs. You can withdraw from your Mutual Funds and get the money in your bank account in 5 working days. Selling your apartment to get the same amount could take months which is not what you would want during an emergency. Additionally if your requirement is only 20 lacs, you can do a part withdrawal on your Mutual funds. This obviously isn’t an option with real estate.
  4. Transparent pricing: Real estate scores poorly on this count. The buy price for the same property can be vastly different depending on whether you are buying or selling. This difference (Called the bid/offer spread) can be 10-20%. In mutual funds, this is zero. If your Mutual Funds are valued at 5 lacs today, you know you will get the same amount in your bank account if you had to withdraw your holdings. However, in case of real estate what the buyer offers you for your property could vastly differ from the price you expect from it.
  5. Transaction costs: The cost of buying or selling a mutual fund is zero while it is usually 2% for property in terms of the brokerage that you pay and 5-15% for registration charges.
  6. Investment maintenance costs: Mutual funds have no ongoing maintenance costs. Whereas for property, there are maintenance charges, cost of upkeep and property taxes.

These factors give Mutual Funds an edge over Real Estate Investments.

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