Real Estate Rental or Mutual Funds which is right for long term investor?
A long-term investor needs to factor lot of parameters before choosing an investment option between a real estate rental property or a Mutual Fund. Understanding below pointers can help investors take better informed decision in selecting the best investment option.
Parameter | Rental Property | Mutual Funds |
Amount & Ease of Investment | For property a big amount of investment is required from lakhs to crores. Further it involves lot of due diligence and paperwork. | One can start into mutual funds very easily with as low as Rs 500. One can invest small amount monthly through SIP & create a good corpus in the long run. |
Additional Cost | Stamp Duty & Registration charges, Maintenance Charges, Parking Charges, Insurance Charges. | No additional charges. |
Diversification | Diversification is not possible in real estate due to high cost of investments. | Mutual fund by way of its structure offers diversification, further one can invest into multiple mutual fund schemes and themes to give diversification to portfolio. |
Risk factor | Rental incomes can fall or rise depending on the economic situation, upkeep of the property or due to no tenancy during some periods. | Mutual Fund performances are subject to market risk. Market performance does not remain same all the time. |
Liquidity | Properties are the most illiquid assets. One may need to wait for months to get a suitable value of the property. Further broker costs deplete the return on investments | You can redeem mutual funds very easily and get your money in your bank account in T+1 or T+3 working days in your account depending on the nature of the scheme. |
Returns | A residential property in India normally generates an average rental yield of around 3% and commercial property around 8%. But these cannot be consistent lot depends on many factors like location of property, built quality, right tenancy etc. | Equity mutual funds over a long period of time can generate around 12% returns. |
Taxation | Rental Income from property is taxed at individual’s tax rate. So, a person in highest tax bracket will end up paying 30% + Surcharge. | Long Term Capital Gain Tax in Equity Mutual Funds is just 10% making it most sought after investment product. |
Conclusion
Though in India lot to investors invest into Real Estate to generate rental income but due to less liquidity, overhead charges, low rental yields now there is big shift towards mutual fund investments. Mutual funds are coming out to be a preferred choice as they have the potential to generate much higher returns with better liquidity.