Mutual Funds vs Real Estate: Which is Better for Long-Term Investment?

6 mins read
by Angel One
Stocks and bonds or physical structures made of iron and bricks? Unravel the long-term investment battle between two popular investment vehicles in India, i.e. mutual funds vs. real estate.

Embarking on a long-term investment journey presents exciting opportunities but also crucial choices. Should you navigate the dynamic stock market with mutual funds or opt for the tangible asset of real estate? This article dives deep into the pros and cons of each option, exploring key factors like returns, liquidity, risk, and management requirements. 

In case you need a quick recap, a mutual fund pools together funds from hundreds and thousands of retail investors and then invests those funds as per a particular strategy. This strategy could be limited to an asset class like stocks and bonds, to a set of sectors like banking or PSU, or to any other factor, like market cap, index, etc. On the other hand, real estate investments basically involve buying land or property and gaining from either rent or capital appreciation, i.e., an increase in the price of the land over time. 

Now that you know the basics, get ready to unlock the secrets of building your wealth brick by brick or share by share!

Key Characteristics of Mutual Funds

  1. Pooled Investment: Your money joins forces with others, allowing access to a diversified portfolio of stocks, bonds, or other assets, even with small investments.
  2. Professional Management: Experienced fund managers research and choose investments, saving you time and effort.
  3. Diversification: Spread your eggs across multiple baskets, mitigating risk by not relying on a single asset.
  4. Liquidity: Easily buy and sell shares within the fund, offering flexibility compared to directly owning individual stocks.
  5. Transparency: Regular reports disclose fund holdings and performance, keeping you informed.
  6. Fees: Management fees and expenses are deducted from the fund’s returns, impacting performance.
  7. Risk: Market fluctuations affect fund value, so understand your risk tolerance before investing.
  8. Variety of Options: Choose from various funds based on investment goals, risk appetite, and asset classes.
  9. Systematic Investment Plans (SIPs): Invest regularly (even small amounts) to benefit from rupee-cost averaging and build wealth over time.

Also Read More About What is SIP?

Mutual funds are not guaranteed to generate returns, and past performance is not necessarily indicative of future results. Conduct your research and consult a financial advisor before investing.

Key Characteristics of Real Estate Investments

  1. Tangibility: Unlike stocks and bonds, real estate offers a physical asset with inherent value and potential for appreciation.
  2. Income Generation: Renting out properties can provide a steady stream of passive income, creating a dependable cash flow.
  3. Capital Appreciation: Over time, property values can increase, offering potential for long-term capital gains.
  4. Leverage: Since the minimum investment required in real estate is usually quite high, investors often rely on debt to finance their real estate purchases. Be mindful of the associated risks and debt obligations.
  5. High Costs: Transaction costs, ongoing maintenance, and property taxes can significantly impact profitability. 
  6. Illiquidity: Unlike publicly traded stocks, real estate assets can take longer to sell, requiring a longer investment horizon.
  7. Location Dependence: Property value heavily relies on location, requiring thorough market research and due diligence.
  8. Management Intensity: Direct ownership demands active management, while rentals involve tenant interactions and potential vacancy periods.
  9. Diversification Option: Real estate can add diversification to your portfolio, potentially mitigating overall risk.
  10. Unforeseen hassle: Land-related business in India often involves illegal activities, nepotism, bribery, hooliganism, legal issues, etc. This leads to a high amount of long-term risks that only a handful of people have the resources to handle.

Real estate investments come with unique risks and require in-depth analysis. Consider your financial goals, risk tolerance, and investment expertise before diving in. Consulting a real estate professional is highly recommended.

Advantages of Mutual Funds Over Real Estate

While both offer investment opportunities, mutual funds hold certain advantages over direct real estate ownership:

  1. Accessibility and Diversification: Invest with smaller sums in a professionally managed portfolio of multiple assets, instantly achieving diversification, unlike buying a single property.
  2. Liquidity and Flexibility: Easily buy and sell mutual fund shares anytime, offering greater flexibility compared to the often lengthy process of selling real estate.
  3. Professional Management: Experienced fund managers leverage their expertise to navigate market complexities, saving you time and research efforts.
  4. Reduced Management Burden: Avoid the responsibilities of direct property management, including tenant issues, repairs, and maintenance.
  5. Lower Entry Barrier: Invest with smaller amounts compared to the significant upfront costs associated with real estate purchases.
  6. Transparency and Convenience: Regular reports and online access provide clear insights into your investments, unlike the opaque nature of private property transactions.
  7. Accessibility to a Wider Range of Assets: Gain exposure to diverse asset classes (e.g., international stocks, commodities) not readily available through individual real estate purchases.
  8. Systematic Investment Options: Automate regular investments through SIPs, benefiting from rupee-cost averaging and building wealth over time.
  9. Lower Transaction Costs: Avoid expensive closing costs, realtor fees, and property taxes usually associated with real estate transactions.
  10. Reduced Risk: Diversification across multiple assets mitigates risks associated with individual property performance and market fluctuations.

Advantages of Real Estate Over Mutual Fund

While mutual funds offer convenience and diversity, real estate boasts unique advantages for certain investors:

  1. Tangible Asset and Inflation Hedge: Own a physical asset with intrinsic value, often appreciating over time and acting as a natural inflation hedge, unlike purely paper-based investments.
  2. Advantages of residence: If you are buying residential property, then it may give you the added advantage of a comfortable living, heightened status in society and enhanced security. The owner of a house, whether residential or commercial, commands a higher level of influence and respect than a retail investor in a mutual fund.
  3. Direct Income Generation: Generate passive income through rentals, creating a dependable cash flow that many mutual funds may lack.
  4. Tax Benefits: Enjoy potential tax deductions for depreciation, repairs, and mortgage interest, offering tax advantages unavailable to mutual fund investors.
  5. Greater Control and Customisation: Tailor your investment to specific needs and preferences, choosing property type, location, and management approach, unlike the standardised nature of mutual funds.
  6. Long-Term Appreciation: Historically, real estate values have shown long-term upward trends, potentially offering higher capital gains compared to average mutual fund returns.
  7. Hedge Against Market Volatility: Real estate often demonstrates a lower correlation with stock market fluctuations, potentially offering stability during economic downturns.
  8. Tangible Legacy: Build a tangible inheritance for future generations, unlike the readily liquidated nature of mutual fund holdings.
  9. Sense of Accomplishment: Experience the satisfaction of owning and managing real property, creating a tangible connection to your investment.

How To Decide Which One Should You Go For?

Deciding between real estate and mutual funds requires introspection into your financial goals, risk tolerance, and desired time horizon. Here’s a breakdown to help you navigate this critical choice:

1. Residential Needs:

  • Real Estate: Buying a home might be ideal if you seek a place to live. You acquire equity over time, potentially appreciate in value, and enjoy tax benefits (depending on location). However, upfront costs, maintenance, and illiquidity are significant drawbacks.
  • Mutual Funds: Investing in residential REITs offers exposure to the housing market without direct ownership. This provides liquidity, diversification, and professional management, but returns might be lower and lack the tax advantages of owning.

2. Larger Plans:

  • Real Estate: For long-term wealth creation, building a rental portfolio can generate passive income and potential capital appreciation. If you are building a factory or a commercial space, then making prudent real estate investment is necessary. However, there are risks, too. Leverage can magnify returns, but be mindful of risks and debt obligations.
  • Mutual Funds: Investing in growth-oriented equity funds aligns well with long-term goals. Diversification mitigates risk, and professional management simplifies the process. However, returns are subject to market fluctuations.

3. Simple Investment:

  • Real Estate: Crowdfunding platforms offer fractional ownership in real estate, requiring smaller investments and reducing management burdens. However, due diligence requirements remain higher than mutual funds.
  • Mutual Funds: Index funds or ETFs provide passive management and low fees, making them ideal for hands-off investors. Their diversified nature minimises risk, but returns might be moderate.

4. Returns:

  • Real Estate: Historically, real estate offers stable returns with potential for appreciation. Rental income also adds a passive income stream. However, returns are slower and depend on location and market conditions.
  • Mutual Funds: Returns vary significantly based on the chosen fund type and risk profile. Equity funds offer higher potential returns but come with higher volatility. Bonds and income-oriented funds prioritise stability over high growth.

Remember, the “right” choice depends on your individual circumstances. Consider seeking professional financial advice to tailor your investment strategy to your unique needs and risk tolerance.

Here are some additional factors to consider:

  1. Your age and investment horizon: Younger investors with a long-term outlook can tolerate higher risk for potentially higher returns.
  2. Your available capital: Real estate often requires significant upfront investment compared to mutual funds.
  3. Your risk tolerance: If you have a low-risk tolerance, prioritise stability and consider income-oriented options.
  4. Your desired level of involvement: Real estate demands active management, while mutual funds require minimal effort.


If you are interested in mutual funds or other stock market investments, open a demat account with Angel One today!


Which offers higher returns, mutual fund or real estate?

Both have the potential for good returns but with different profiles. Real estate offers stable returns with appreciation, while mutual funds offer higher potential rewards (and risks) depending on the chosen type.

Which investment has more risk, real estate or mutual fund?

Real estate is generally considered less volatile than the stock market, but individual properties can be risky. Mutual funds offer diversification, spreading risk across multiple assets.

What costs more to get started, real estate or mutual fund?

Real estate requires a significant upfront investment, while mutual funds allow you to start with smaller amounts.

Which one needs more time to manage, real estate or mutual fund?

Real estate demands active management, while mutual funds require minimal effort after choosing the right one. In fact, management of real estate may get more problematic if there are legal issues involved.

Which is more liquid, mutual fund or real estate?

Mutual funds can be easily bought and sold, while real estate can take time to sell, making it less liquid. However, there is no exit load on real estate, while some mutual funds can have both exit loads and minimum investment periods.