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Real Estate vs Mutual Funds – Which is the Better Investment Option?

Updated on: Jan 6th, 2023


7 min read

Should I invest in real estate or mutual funds? This is the first question that arises in the mind of every investor before he/she begins his investment journey. The article discusses everything you need to know about real estate and mutual funds investments and help you choose the best investment option.



One of the major aspects you should consider before investing in real estate is its consistency. Many investors believe real estate investments to always improve over time. Truth be told, these investments are highly inconsistent. The real estate value of a property can decline even after development in the area. Let’s assume that you invest in a real estate property on the outskirts of the city, which is soon expected to be developed. The value of the property can go up over the next few years with the development factor playing a major role.

However, the value can be reduced over time considering aspects of a developed area such as increased traffic or poor access to the city. Mutual funds, on the other hand, has comparatively shown better consistency and provided inflation-beating returns over the last few years. Though mutual funds come with a risk, the very risk can be contained by investing moderate risk funds such as debt funds or hybrid funds, which are involatile and offer steady returns.


In the present scenario, the performance of real estate investments falls behind that of mutual fund investments. Real estate investments are more or less considered like fixed deposits now as the returns generated are similar. However, mutual funds have proven to be quite a common option for investors who wish to accumulate wealth despite inflation. The power of compounding in mutual funds help generate higher returns when compared to real estate investments which fail to perform during inflation.


The last thing an investor would want to see is his/her investments being caught up in a legal dispute or litigation. The dispute can go on for a long period, which can prove to be tedious for the investor. There can also be instances where an investor might have to shell out extra hard-earned money during the dispute. This will not only bring down the value of the property but also lower the returns generated from your investments. Since mutual funds are well regulated and controlled by the Securities Exchange Board of India (SEBI), the chance of litigation/dispute is highly unlikely.


Real estate investments are often considered risky due to the inability to monitor the performance of the investments. Failure to track your investments can also result in disputes over time if you have invested in a real estate property with partners. However, mutual funds investments can be monitored online from time to time during which you can also track the performance of your funds. This ultimately brings down the probability of any dispute or litigation.


The returns generated by investing in mutual funds are comparatively higher than that of real estate investments. While the rate of returns on real estate can range from 7% p.a. to 11% p.a., mutual funds offer returns ranging between 14% p.a. and 19% p.a. depending on the type of fund. This allows investors to generate high returns which bear the effect of inflation and accumulate wealth.


The quantum of funds always plays a major role while investing. While mutual funds require small amounts to be invested, you will have to shell out a large amount if you wish to invest in real estate. For most of us, we might not have adequate funds at disposal to invest in real estate. However, mutual funds give us the benefit of making investments either in small amounts or in lump sum amounts depending on our financial stability. You can invest through a Systematic Investment Plan (SIP) in mutual funds by allocating a small portion from your bank account, which will be auto-debited on a monthly basis.

Tax Implications

Both real estate and mutual funds investments give you tax exemptions. However, mutual funds have an upper hand with these funds also recognised as tax-saving investments among most investors. Under Section 80C of the Income Tax, 1961, you can be eligible for tax benefits up to a maximum of Rs 1,50,000 on investments made towards mutual funds. This allows investors to save on taxes. Real estate investments can also help you save on taxes but through indexation. Indexation helps in lowering your taxes by considering the impact of inflation on the real estate value of your property. However, the tax exemptions offered on real estate is comparatively lower than that of mutual funds.


One of the main benefits investors expect from their investments is liquidity. The sooner investors are able to liquidate their funds and investments, the better. The liquidation of real estate is not easy considering the fact that there is no market which allows you to complete the transaction soon. It is a time-consuming procedure. You may not be able to liquidate your investments in a time when you are in a financial crisis. Mutual funds, however, allow you to liquidate your funds and sell them through an online market whenever they are in need of funds. Liquidity is one of the major reasons why individuals invest in mutual funds.

Power of Compounding

Mutual funds investments generate high returns over time. This is due to the power of compounding on your funds, which is not applicable to real estate. For instance, if you invest Rs 2,00,000 in mutual funds, which offer 14.9% p.a. for a tenure of 20 years, the returns generated will amount up to Rs 32.17 lakh at maturity. Invest in mutual funds and unleash the power of compounding to get inflation-beating returns.

Ease of Investing

Real estate investments involve a lot of procedures and paperwork. In addition, investors also incur other expenses such as CERSAI charges, stamp duty, registration charge, etc. It can be a quite tedious and time-consuming process for investors. On the other hand, investing in mutual funds is an easy process. It only takes is a few minutes to start investing. All you have to do is invest through a SIP post where the amount will be debited automatically from your bank account on a monthly basis. There are also no additional expenses involved in these investments.

What are Real Estate Investment Trusts (REITs)?

While the above comparison was true for traditional modes of investing in real estate, now we can see REITs gaining popularity. REITs are an equity asset similar to a fund, which invests in real-estate-related assets such as commercial office space buildings, corporate parks, shopping malls and retail stores. A REIT functions in a similar way to mutual funds and offers you an easy way to invest in real estate. It provides the advantage of diversification and long-term capital appreciation. Now this eliminates the need of huge capital and tedious paperwork, making investments in real estate easier. 


When comparing different investment options, a large portion of investors still opts for real estate. However, it has become a risky investment with its value declining over the last few years. New developments like REITs, though, bring in a fresh new perspective. Mutual funds, on the other hand, generate high returns with moderate risk. As an investor, you would want to have a diversified portfolio which gives you the best returns possible and mutual funds offers you just that!

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Quick Summary

The article discusses real estate vs mutual funds investments. It highlights the inconsistency of real estate, performance differences, litigation risks, monitoring ease, higher returns from mutual funds, lower investment requirement, tax implications, liquidity benefits, compounding power, and ease of investing. It concludes by emphasizing the advantages of diversified portfolio through mutual funds.

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