Real Estate Vs. Mutual FundsBy
Akhila Masapogu, 16-Jan-2020
Why Invest in Real Estate?
Land as an asset has always had unique importance in the history of India. Investing in such an important asset for the sake of personal use may require much of the market study. Since investments are concerned, here are the points to be considered for real estates:
Ever since the employment of the Real Estate Regulation Act (RERA) in 2016, transparency and hold on misconduct by the builders have been observed, opening a protected opportunity for the investors. India Brand Equity Foundation foresees investments in the housing sector of the country to be as extensive as the US $1.3 trillion by 2025. This fact is backed up by a robust increase in demands of commercial and residential realty in India with urbanization giving a new shape to the country. As a result of digitalization and transparency rising in the Indian economy, the private sectors are witnessing a surge in real estate investments.
In the aftermath of demonetization, the real estate sector has witnessed significant demand in affordable housing. It opens the gates of investments in properties to rent out spaces in the later stages. The booming money lender companies allow the home buyers to buy properties in installments with low EMIs and other freebie alternatives that can be availed from the current market. More properties and homes are an added advantage to the investors’ wealth report as the demands have shown a significant rise in the graphs of the realty sector.
What do you understand by Mutual Funds?
Mutual funds investment facilitates pooling money from investors and then invests the larger amount in several investment assets such as equity & stock market, foreign securities, gold or other potential asset windows. Mutual funds are beneficial for investors who lack a larger monetary capacity for making investments or enough time for market research for other investment options. In Mutual funds, the funds acquired from investors are managed by expert fund managers, assuring, safety under the capital market regulation of SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds in India). Mutual funds are a dynamic set of opportunities for investors as it allows investment in all sizes with the lowest and highest possible investments. It also helps them become stakeholders of the investments in diverse portfolios.
The mutual funds give their investors liberty to be actively or passively invest and manage their funds. It benefits its investors from the upper trends of capital markets. It is beneficial but the right choice of funds is a challenge. Although the market risks pertain to all the assets in the investments, the volatility in equity markets is higher than that of inflation risks. It is observed to be an aggressive but gradual process. Therefore, fluctuation in the stock market due to its volatile nature can land the stakeholders into a risk of losing their value in no time.
Long term and short term performances
Some assets encourage long-term scenarios with bigger plans for investments. The others can achieve quick bucks in shorter spans but their risks and size of profitability may be a question. The real estate sector offers long term assurance and higher returns in terms of investments. With the help of Non-Banking Finance Companies funding the developers, the supply-demand mismatch in the real estate sector has recovered eventually. The study on trends of residential real estate sector of India suggests that realistic, mature and steady graph has replaced the haphazard growth of real estate market growth in the country. With a span of 5 – 7 years the investors might be able to provide 10% of annual returns while perennial rental incomes from the properties will contribute much more in the long run.
The mutual funds offer opportunities for investors to invest in the long term as well as short term investment plans. The returns from mutual funds depend on their holding periods. At times, capital gains may be obtained in only a few months. Conversely, funds invested and held for longer terms might have degraded its value owing to the volatility of the asset.
Comparative risk assessment
|Real Estate||Mutual Funds|
|Economic risks involving fluctuations in interest rates, inflation rate, etc. (short term goals)||Debt mutual funds experience high risks due to interest rate fluctuations in the market|
|The rental sector may seek asset-level risk due to the increasing sharing economy concept in the market.||High exposure to equity in the volatile market holds a backfiring scheme and can incur huge losses in the investor’s portfolio.|
|Idiosyncratic Risk relative to a particular project is subjective to real estate. The delayed or rejected proposals from governmental bodies is a pit in the investment plans in short term goals||Return on equity is solely dependent on the volatility of the market. Low-performance risk is subjected to high risks in both short term and long term investments|
|Liquidity risk of stagnant dead investment is a crucial risk but for short terms only. In the longer run, the profitability is assured and liquidation is healthily obtained||Liquidity risks in the closed-end investment for the long term plans is an inevitable risk that comes along|
|Credit risk is meager in this sector as reselling of the property at minimal rates would also be profitable||Credit risk in terms of Debt mutual funds is an alarming factor that prevents investors to root for mutual funds|
|Replacement risk is minimal for newer properties, whereas significant for older ones||Replacement risk related to switching cost in the policies is moderate|
|The structural financial risk applies only when the background of the investor is not stable||The structural financial risk is heavily imposed where investors are unable to pay their share in the investment plan and heavy penalties are levied on them|
|Leverage risk rises only when investments are made with huge debts and return on assets is questionable||Leverage risk roots for potential profits only when the investment is secured. Otherwise, it’s a risky turmoil for the investor|
Redemption of open-ended mutual funds is easy but solely dependent on the volatility of the stock market whereas the dissolution of close-ended mutual funds before its maturity comes with huge deductions. In real estate, without investing a huge amount of money, based on the token fee and goodwill of an individual, one can buy and sell properties at current market rates and earn the difference amount in millions. Exit option in real estate is majorly controlled by the investor whereas in mutual funds, the investor is majorly dependent on the market rates.
Concluding the comparative study, it can be deduced that real estate comes with the added benefit of a physical asset that can be bought, used, and sold giving profitable outcomes economically, financially, mentally and physically. Whereas, investments in mutual funds is a virtual bubble that can’t be used by an individual. Assetmonk provides a profitable platform to potential investors in the long haul. It provides a diversified plan to manage the liquidity of an individual by investing in real estate. Assetmonk assures return on investment with low-risk exposure and high profitable returns.
Post the demonetization phase, the real estate sector has witnessed significant demand in affordable housing. It is opening the gates of investments in properties to rent out spaces at a later point of time in the future. The booming money lender companies are now allowing the home buyers to buy properties in installments with low EMIs and other freebie alternatives that can be availed from the current market. More properties and homes are an added advantage to the investors’ wealth report as the demands have shown a significant upheaval in the graphs of the realty sector. So, this holds a good enough reason for why to invest in real estate now.
Mutual funds investment facilitates pooling money from investors and then investing the collectively invested large amount into several investment assets such as equity, stock market, foreign securities, gold, or various other potential asset windows.
The ‘better’ here is not absolute but variable which means that it might vary depending upon various requirements and factors. The real estate sector offers long-term benefits and higher returns in terms of investments. The study of the residential real estate sector of India suggests within a span of 5 - 7 years, the investors might be able to get 10% of their annual returns while perennial rental incomes from the properties will contribute much more in the long run. Whereas, the mutual funds offer opportunities for investors to invest in the long term as well as short term investment plans. The returns from MF depend on their holding periods. At times, capital gains may be gotten in only a few months. Inversely, funds invested and held for longer terms in MF might degrade in their value owing to the volatility of the asset.
Risks involved in real estate investments:
- Economic risks which include fluctuations in interest rates, inflation rate, etc
- Illiquidity in a short term perspective.
- Leverage risk only when investments are made using huge debts.
Risks involved in mutual funds:
- Debt mutual funds face higher risks due to interest rate fluctuations in the market.
- High exposure to equity in the volatile market holds a backfiring scheme and can cause huge losses to the investor’s portfolio.
- Credit risk in terms of Debt mutual funds is an alarming factor that prevents investors from opting for mutual funds.
Exit option in real estate is majorly controlled by the investor whereas in mutual funds, the investor is maximally dependent on the market rates.
Real estate comes with an extra benefit of a physical asset that can be bought, used, and sold giving very profitable outcomes economically, financially, mentally, and physically. Whereas, investments in mutual funds is a virtual bubble that cannot be used by the investor.