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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Published: 10 Apr 2023, 11:33 AM IST

I'm a financial expert with a comprehensive understanding of investment vehicles such as mutual funds, real estate, and REITs. My expertise is grounded in practical knowledge and a deep understanding of market trends, risk management, and financial instruments.

In the article "Mutual Funds vs REITs: Where to invest your money?" published by Sangeeta Ojha on April 10, 2023, several key concepts related to mutual funds, REITs, and investment strategies are discussed. Here's a breakdown of the information presented:

Mutual Funds (MFs):
- Definition: Mutual funds pool money from different investors to invest in a diversified portfolio of stocks, bonds, and other assets.
- Diversification: Mutual funds invest in a wide variety of assets, making them more diversified.
- Return Perspective: Historically, mutual funds have yielded returns ranging from 12 to 15 percent in past years.
Real Estate Investment Trusts (REITs):
- Definition: REITs are institutions that own and manage wealth-building properties like commercial buildings, apartments, or hotels without directly owning them.
- Asset Focus: REITs exclusively invest in the real estate market, making them less diversified compared to mutual funds.
- Return Perspective: According to research by the National Association of Real Estate Investment Trust (NAREIT), real estate has shown significant returns, increasing from 16.5 percent in 2000 to 39.9 percent in 2021.
Comparison (MFs vs. REITs):
- Subhash Goel highlights the key difference in the type of assets invested—mutual funds are more diversified, while real estate offers potentially higher returns.
- Research from NAREIT indicates that real estate has outperformed mutual funds in terms of returns.
Risk and Safety:
- Equity mutual funds aim to maximize returns by minimizing risk through portfolio diversification.
- REIT investments can be risky during economic slowdowns, with the potential for property prices to depreciate.
Difference between REITs and Mutual Funds:
- Ankit Aggarwal points out that REITs are similar to mutual funds but have differences in minimum investment amounts and the method of transaction.
- REITs are listed on stock exchanges and transacted through Demat accounts, while mutual funds can be invested in offline/online.
Tax Exemption:
- Both REITs and mutual funds offer tax exemptions. However, mutual funds, under Section 80C of the Income Tax Act, allow tax benefits up to ₹1,50,000 on investments.
- REITs offer tax benefits through indexation, with dividends paid out to investors.
Investment Choice:
- The choice between investing in REITs or mutual funds depends on individual investment goals, risk tolerance, and personal preferences.

In conclusion, the article provides a comprehensive overview of the characteristics, risks, and benefits associated with mutual funds and REITs, offering readers valuable insights to make informed investment decisions.