Mutual funds vs real estate: Which one is better for long-term investors

Investing in mutual funds or real estate? Which is superior long-term investment

According to Gurmit Singh Arora, National President, the Indian Plumbing Association real estate involves a considerable initial investment as well as continuous maintenance and repair costs, and it is susceptible to market changes and economic downturns. Furthermore, real estate investments necessitate active management, which can be time-consuming and difficult for some investors.

Real estate is an excellent inflation hedge. The value of properties and rental revenue grow in tandem with inflation. Mutual funds, on the other hand, are sensitive to inflationary pressures, which can erode returns over time, and they also provide various tax benefits, such as deductions for mortgage interest, property taxes, depreciation, and maintenance. “These advantages can drastically lower real estate investors’ tax obligations. Mutual funds, on the other hand, offer few tax advantages and may be liable to capital gains taxes,” said Suren Goyal, Partner, RPS Group

As per Gunjan Goel, Director, of Goel Ganga Group, real estate is a tangible asset that can be touched, seen, and lived in. It gives a sense of security and may be utilised for both personal and commercial purposes. Mutual funds, on the other hand, are intangible financial assets that are dependent on the performance of the underlying stocks. Real estate provides investors with diversification benefits since it is not heavily connected with traditional asset types like equities and bonds. Real estate investments can thereby minimise total portfolio risk and volatility. Mutual funds provide diversification benefits as well, but may not give the same amount of protection during market downturns.

Real estate comes with an additional benefit of generating rental income which is a steady stream of cash flow. Mutual funds, on the other hand, create income through dividends and capital gains, which tend to be volatile and unpredictable, said Mrinaal Mittal, Director, ofBlackteak Realty

Real estate investments provide diversity in a portfolio which can help mitigate overall risk and increase stability. Mutual funds, while they offer diversification within the portfolio itself, do not offer the same level of diversification across asset classes, added Mrinaal Mittal

An additional benefit is the tax benefits for real estate investors, such as deductions on home loan interest, depreciation on rental properties, and exemptions on capital gains tax for long-term investments which enhance the overall return on investment in real estate.

Prior to taking the decision to invest in real estate of mutual funds, investors should carefully consider their level of risk tolerance, and financial targets, as well as investment horizon. Before engaging in either choice, it is best to obtain professional guidance.

Updated: 17 Jun 2023, 02:49 PM IST