A house is typically the single most expensive item most people will ever buy. Buying a home is going to cost a significant amount of money and generally requires life time savings to build a dream house.

Owning a house is a different feeling which comes with lots of happiness and self-respect. With the increasing price of property owning a house has become difficult. Therefore it is imperative that we need to have a proper financial planning to help you purchase your dream house with least effort and minimum investment.

When you think of investing your money, real estate or gold are the options your parents suggest. However, nowadays mutual funds have emerged as a very good alternative.

In India, real estate has ceased to be a lucrative investment option. This has happened due to the below mentioned problems with real estate. Mutual funds, on the other hand, have become very popular among investors.

Earlier, the perception of people about mutual funds was that it is a risky option. This is because people used to be very risk-averse. Real Estate was considered a very safe option.

This is one of the most talked about questions from an investor point of view. Both of these investments are for the long haul i.e., both the investments demand patience from the investor.

Nowadays, due to a very volatile real estate market, mutual funds are becoming the preferred option.

Which Gives Better Returns: Real Estate or Mutual Funds?

The best way to challenge myths is to look at data and come to conclusion.

The trouble is that Indian real estate sector is very opaque and does not give us enough data points to do a proper job of analyzing it.

In the process, the myth that any real estate investment yields massive amounts of returns at all points of time continues to persist.

Returns from Investment in Real Estate:

Here is a table showing the average returns on investment in real estate for a 5 and 10-year tenure.

Suppose you invest around Rs 50,00,000 in real estate of a big Indian city, these would be your returns.

* Average data is taken for simplicity of calculation

Returns from Investment in Equity Oriented Mutual Funds:

Here is the table showing the average returns on investment from equity-oriented mutual funds for a 5 and 10-year of investment tenure. Suppose you invested around Rs50,00,000 in the least risky equity mutual funds and the returns you would have got at the end of 5 and 10 years are shown.

By comparing both the tables above, we can easily come to conclusion that large and multi cap equity funds tend to give higher returns compared to real estate in the long-term.

In the large and multi-cap type of mutual funds, the investment is made in large-cap companies.

These funds have historically given returns between 15% and 20%. Moderate risk is involved and it is suggested to invest in these funds for more than 5 years.

Points to Consider: Real Estate vs Mutual funds

1.    Unpredictability

Real estate investments are very unpredictable. There is a wrong perception among people that real estate is an investment which will always goes in the upward direction. But it is not always so.

The values also goes down. The primary reason for that is unpredictability. For example, the value of land on the outskirts of a city 10 years back can move upwards due to development of the area.

Whereas the same area after development might not be very lucrative for investors, due to increased traffic menace. Hence, the value of the same plot of land is reduced.

Now, when we talk of mutual funds, you might think that it is a risky investment but same is not true. Equity mutual funds are safe if invested for long term horizon. If we can invest in MF for 10-20 years period as we invest in a property then mutual funds investment can turned to be greatly rewarding. The returns generated by MFs in last 10 years and 20 years can be checked to confirm the same.

2. Real Estate Is Underperforming

Real estate investments are quite under-performing in nature. They offer less than or equal to the same amount of returns as a fixed deposit. Real estate investment often fail to bear the effect of inflation. Mutual funds take the effect of inflation in their returns.

3. Litigation/ Disputable

There is a chance of your investment to be caught in a dispute or litigation. This becomes quite tedious and inconvenient for the investor.

In India especially, a can go on for years, so it becomes very difficult for the investor to cope up with the situation. Ultimately, it is a destruction of wealth of the investor who has invested their hard earned money in the real estate market.

Mutual funds on the other hand, are not marred by this problem. Mutual funds are well regulated.

So the risk of dispute is very low.

4. Emotional Investment

Real Estate is generally an emotional investment.

It is not just the investment of money from the investor, but also an investment of memories & emotions that the investor might have invested into the particular property.

Due to this, the investor faces the risk of two kinds of losses i.e., monetary as well as emotional.

Mutual funds are not emotionally invested in by the investor. They are invested through proper research. Plus, there is a fund manager for every fund, who is constantly researching the market and making informed investment decisions.

5. Tracking of Investment is not feasible

Unlike mutual funds, the investor cannot track their investment in real estate. In mutual funds, the investors can track their investments online and can monitor the growth/decline in their investment.

In real estate, such tracking is not possible. This creates a risk in the investment as one cannot monitor the investment properly.

This ultimately leads to the dispute problem as pointed out in point no. 3 above.

6. Slow Returns

Real Estate comparatively gives you fewer returns with the same time investment.

For example, investment in real estate of Rs 50 lacs for a period of 30 years would give you lesser returns as compared to the investment of Rs 50 lacs in mutual funds for the same amount of time.

You can check out your returns through an SIP via the SIP calculator.

FUNDS MASTERS RECOMMENDATIONS

Buy your dream House to live happily with your beloved family.  

Do not invest in residential property as investment.

Property Prices generally saturate after a period of time and therefore continuous appreciation prospects are limited.

Property transaction is quite tedious and safe guard property requires lots of effort & time.

Real State sector is loosely regulated and Fraudulent/unlawful activities are dominant. 

RERA will take time to be effective.

Thousands of Investors have lost their life long savings by renowned builder and fighting court cases to get back their money/flat.

Equity MF has potential to generate better returns than returns expected by property in long term. 

HOW TO PLAN FOR DREAM HOUSE

Goal planning to purchase your dream House for living is essential to achieve target investment amount.

Set target amount for purchase of house at target date considering the inflation.   

If your goal is more than 5 years away then start investing in Equity Mutual funds.

Decide the amount of lump sum and SIP investment to achieve target investment amount.

Select right Mutual Fund for investments.

Review your investment decisions once in a year.