Property or mutual funds: Where should your money go?

Recently, one of our readers reached out with a query. Having inherited property from his deceased father, he wanted to know if selling it off and investing the money in mutual funds would be wise.

Choosing to invest in real estate versus financial assets is a dilemma that many Indian investors face.

Yet, upon comparing the returns and a few other factors, the scales tip in favour of financial assets.

As per the graph, real estate has delivered an average annual yield of 7-10.3 per cent over the last seven years, across major cities in India. Having said that, these returns can vary widely depending on the location. More importantly, they are an average and pertain to a specific period. Further, we have not factored in the expenses tied to property ownership - taxes, maintenance bills and the vacancy costs.

On the other hand, the Sensex - a popular market index - clocked a robust 14 per cent return over the same time frame.

Keeping the financial angle aside, owning a property has its fair share of headaches: tenant selection, property upkeep, fear of encroachment, to name a few. Moreover, the illiquid nature of real estate is also a problem since property disposal needs to be planned.

But if financial assets are a better choice, why do Indians continue to allocate a substantial amount of wealth towards real estate?

First, real estate investment isn't traded daily, unlike financial assets. Even though financial assets might provide better returns, watching your investments fluctuate can compel you to sell your investments at the wrong time.

Real estate, meanwhile, allows for a sound sleep until you decide to get the property value appraised. The crux boils down to whether you can remain sane while the market goes up and down. Also, owning a property is often more of an emotional decision than purely a financial one because, to many people, having their own house brings fulfilment. Inherited property, even more so, as people might be reluctant to sell it owing to legacy concerns.

Having said that, if you have another house to live in, it makes sense to invest the proceeds in financial assets for the long term. We advise investing the funds by systematically spreading them over a three-year period.

While selling the property will trigger a 20 per cent long-term capital gains (LTCG) tax, we suggest moving the money to mutual funds as they usually prove beneficial in the long run.

Also read: REIT or wrong?