Why Mutual Funds May Trump Real Estate as An Investment Option?

Why Mutual Funds May Trump Real Estate as An Investment Option?

We Indians are believers in creating assets and leaving it behind for the next generations. Saving up and funding assets is a must, for most Indian families. So, what kind of assets do we look at investing in? In a typical Indian family, it will mostly be gold, real estate (either a plot or a house), and in a rapidly growing crop of people, mutual funds and SIPs as well. So, what prompts our choices and how do we make our asset allocation decisions?

We recently shared our views on the pros and cons of gold as an investment option. So, left with the possibilities of real estate and mutual funds, let’s look at which one to choose and what are the pros and cons.

Initial investment

Many people usually save up for years to purchase a real estate asset as it is never cheap. The initial investment in real estate is always high, and at most times, apart from their entire savings, most buyers also end up taking huge loans. These loans can become a liability in the long run, if not planned for properly. Also, life is full of uncertainties – ill health, loss of job for an earning member, new family commitments, etc. can change the equation overnight.

In contrast, investment in mutual funds can start with as little as even INR 500 or 1000. You could choose to begin a Systematic Investment Plan(SIP) with a small amount per month and slowly build it up into a growing investment. In fact, many people have invested in mutual funds quite early on, from the time they have started earning and made enough profits, to invest in real estate. So, while you may not be able to purchase real estate unless you have lots of money to spare, mutual fund investments can start at an early age, and you need not wait to accumulate your savings.

The Process

Investing in real estate is not an easy process; one has to find the right property, at the right price, at the right time, at the right place. At times, you may have to involve brokers or other such third parties and pay out commissions as well. The property papers must be legally verified, and the due process of registration needs to be completed, which is again a bit cumbersome. In short, it is tedious, fraught with painful procedures.

For investing in mutual funds, however, there are no such hassles. Once you decide the amount you wish to invest, you can quickly start an investment account with your bank and transact online. Your relationship manager at the bank or a trusted financial advisor will help you maximise your returns by growing your money while reducing the risks as much as possible.

The Liquidity Factor

Any investment is made with the intention of growing one’s money and also providing a safety net in tough times. Real estate prices do rise slowly and even accounting for market slumps typically your property value would have gone up. The pain point is liquidity.  If you need money immediately to fund an emergency or new goal, selling your property for the right price promptly is difficult. Here again, the process is long- you need to find genuine buyers, and it takes time for the money to come in hand. In contrast, selling mutual funds is more comfortable, and at most times, the money is back in your account within three working days’ time.

While we all seek the safety and security of owning the roof over our head, do consider first building a growing mutual fund portfolio and then using the earnings to build a dream home.

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Ramesh Sigamani

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