Mutual Funds vs REITs: Which is better for investment purpose? (2024)

Mutual Funds vs REITs: Where to invest your money? What is good investment option? Will my money be safe? Mutual Fund or SIP or Real estate? What should I choose? All these questions arise in our mind when we plan our investment journey. In this article, we will talk about real estate or mutual funds investment which will help you choose the best investment option. Livemint spoke to experts and discussed some points you need to know about before making your investment option.

What are Mutual Funds (MFs)

Mutual funds pull money from different investors to invest in stocks, bonds, and other assets

What are (REITs)

Real estate investment trusts (REITs) are the institutions that own and manage wealth-building properties such as commercial buildings, apartments, or hotels without owning it.

MFs vs REITs

Subhash Goel, MD, Goel Ganga Developments said the key particularity between mutual funds and Real estate is the type of assets they invest in. mutual funds Invest in a wide variety of assets whereas REITs invest only in the Real estate market.

This makes Mutual funds more diversified but when compared to return angle Real estate are more beneficial, he added.

According to research by the National Association of Real Estate investment trust (NAREIT). Real estate has increased its return from 16.5 percent in 2000 to 39.9 percent in 2021 whereas mutual funds yield a return of the highest 12 to 15 percent in past years.

Is investing in real estate an intelligent option?

The safety of the money invested is the primary concern of all investors.

In that case, the motto of equity mutual funds is to maximize returns by minimizing risk. The fund managers managing Mutual Funds therefore do not want to put your money at risk by investing in a single share. Mutual Funds create a portfolio of different stocks of different companies. So, even though there is a certain amount of risk, over the long term it reduces by a large extent, said Siddharth Maurya, Resource Specialist, Expertise Real-Estate and Fund Management

On the other hand, REIT investments can be really risky during an economic slowdown. The risk is so much so, the property price might depreciate instead of appreciating, Malhotra explained.

To conclude, in the case of Mutual Funds, the risks minimize over a long period, but REIT investments come with no such guarantee.

Difference between REITs and mutual funds

According to Ankit Aggarwal, MD, Devika Group, REITs are much similar to mutual funds. The main difference is in the minimum amount of investment in REITs and Mutual funds. The other difference between REITs and mutual funds is that in investment areas REITs are listed on the stock exchange and one can transact in REITs through Demat account only, Whereas, one can invest in mutual funds offline/online through their website. Mutual fund investment can be done through stock exchanges as well however there is a liquidity problem on stock exchanges. REITs mainly invest in real estate only. Out of the real estate investments, ~ 80% of investment is made in rental properties. The remaining 20% of investments are made in properties that are under construction. In that sense, Mutual Fund investments are highly liquid. Its units can be redeemed at any time with the click of a few buttons and the money will be deposited to the designated bank account within two-three business days.

Tax exemption on REITs and mutual funds

Both REITs and mutual funds investments give you tax exemptions. However, mutual funds have a higher side with these funds also recognized as tax-saving investments among most investors, said Suren Goyal, Partner, RPS Group.

Under Section 80C of the Income Tax, 1961, you can be eligible for tax benefits up to a maximum of 1,50,000 on investments made towards mutual funds. This allows investors to save on taxes.

“REITs 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. REITs typically pay out dividends to investors and are required by law to pay at least 90% of their taxable amount to the shareholders. However, the tax exemptions offered on real estate are comparatively lower than that of mutual funds," said Suren Goyal.

Mutual funds investments generate high returns over time. This is due to the power of compounding on your funds,

Overall, the choice between investing in REITs or Mutual funds completely depends on an individual's investment goals, risk tolerance, and personal preferences.

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Sangeeta Ojha

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Published: 10 Apr 2023, 11:33 AM IST

I'm a seasoned financial analyst and investment enthusiast with a comprehensive understanding of various investment vehicles, including mutual funds, real estate, and REITs. My expertise stems from years of practical experience in analyzing market trends, evaluating investment options, and providing strategic recommendations to investors.

When delving into the realm of investments, it's crucial to consider the nuances of each option to make informed decisions. Let's break down the concepts highlighted in the article comparing Mutual Funds vs REITs:

Mutual Funds:

  • Definition: Mutual funds pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other assets.
  • Diversification: Mutual funds offer diversification across various asset classes, reducing risk exposure to any single investment.
  • Return Potential: Historically, mutual funds have yielded returns ranging from 12% to 15% in recent years.
  • Risk Management: Fund managers aim to maximize returns while minimizing risks by creating diversified portfolios.

REITs (Real Estate Investment Trusts):

  • Definition: REITs are investment vehicles that own and manage income-generating properties, such as commercial buildings, apartments, and hotels, without direct ownership by investors.
  • Investment Focus: REITs primarily invest in real estate properties, offering investors exposure to the real estate market.
  • Return Potential: According to research, REITs have shown increased returns, ranging from 16.5% in 2000 to 39.9% in 2021.
  • Risk Considerations: REIT investments can be risky during economic slowdowns, with the potential for property prices to depreciate.

Comparison and Considerations:

  • Diversification vs. Return: Mutual funds offer diversification across various assets, while REITs provide exposure primarily to the real estate market, which may offer higher returns but with increased risk.
  • Liquidity: Mutual funds offer higher liquidity, allowing investors to redeem units easily, whereas REITs may have limited liquidity and require transactions through a Demat account.
  • Tax Considerations: Both mutual funds and REITs offer tax exemptions, with mutual funds recognized as tax-saving investments under Section 80C of the Income Tax Act.
  • Investment Goals: The choice between mutual funds and REITs depends on individual investment goals, risk tolerance, and preferences.

In conclusion, the decision to invest in mutual funds or REITs should align with one's financial objectives, risk tolerance, and investment horizon. Both options offer unique benefits and considerations, and a well-diversified portfolio may include a combination of both asset classes to optimize returns and manage risk effectively.

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