Nothing beats investing in mutual funds and real estate if you want to generate passive income. Mutual funds allow you to earn monthly income through a systematic withdrawal plan and dividend option. In contrast, real estate allows you to rent your property for residential or commercial use.
However, with surplus income, you must be wondering whether to invest in mutual funds or real estate. Let's find out.
Real estate vs mutual funds: Key distinctions
Mutual funds, especially equity-oriented schemes, are noted for their aggressive returns. If the market does well, equity mutual funds can generate 15-20% returns. In contrast, debt-oriented schemes with a portfolio mix of government securities and corporate bonds provide 10-12% returns.
In contrast, according to reports from various research firms, the average real estate return over the last ten years has been around 10% in nine major Indian cities.
When you factor in the post-tax returns, the difference between the two options becomes significant.
Real estate assets are valued in lakhs, and for larger properties or those in metropolitan areas, in crores. If you want to sell the house right away because you are tight on cash, it will be difficult to find a buyer. Even if you do find someone who is ready to purchase your property with financing, it may take 30 to 45 days for the loan to be approved and sanctioned.
The above is not the case with mutual funds. You can make a redemption request whenever you wish. When you sell your unit using the broker's platform, you will receive the proceeds within two to three business days.
You can set up a Systematic Investment Plan (SIP) with mutual funds for just Rs 500. A few thousand rupees would be enough even if you want to make a lump sum investment.
However, real estate investment requires a hefty sum. For example, if you want to buy an apartment in a premium neighbourhood in Mumbai, a 2 BHK apartment of roughly 650 sq ft will cost you around Rs 3-4 crore. However, a similar flat in a city in Uttar Pradesh would cost between Rs 30 and 40 lakh.
If you want to buy land, the price will be lower than for ready-to-move properties in the same area.
The pricing factors for real estate and mutual funds differ. Real estate prices are directly tied to demand and supply. Given the growing population and the scarcity of land available for residential or commercial purchasing, the likelihood of property value depreciation is low.
However, there are some instances in which the real estate value could plummet. For example, if you purchased a piece of property a few years ago and the government has now declared that region a green zone, not only would the value decrease, but you will be unable to sell it to anybody else.
Mutual funds, on the other hand, expose investors to volatility risk. If there is an economic slowdown or an increase in interest rates, the stock prices in the fund portfolio will fall, lowering the net asset value.
If you choose to redeem your stock holdings in mutual funds after a year and your investment profits total Rs 1 lakh, you must pay a 10% long-term capital gains tax. No tax will be charged if the profit is less than Rs 1 lakh.
If you want to exit debt funds after three years of investment, you must pay a 20% long-term capital gains tax. However, note that a three-year holding term qualifies you for indexation benefits, a type of tax relief.
Real estate also has various taxation benefits under the Income Tax Act, 1961. For example, if you bought the property on loan, the principal amount qualifies for a Rs 1.5 lakh deduction under Section 80C. You can also get an interest deduction under Section 24B. If the house you purchased is your first real estate property, an additional deduction of Rs 50,000 under Section 80EE is available.
Tax perks are also available for property registration charges and stamp duty.
Conclusion
Both real estate and mutual funds offer passive income opportunities. Consider your financial goals, risk tolerance, and investment preferences when deciding between the two. Remember, diversification across both can enhance your investment portfolio and mitigate risks.
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