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Mutual fund vs Real estate
What is better buying a house or investing in mutual fund ?
63 months ago
4 answers
It also depends on your location and market. When you are in countries like India, China and Phillipense real estate gives you much better returns than any other bond. But at the same time - your initial investment has to be equally high. Also in real estate ( in the South Asian market) there are three categories -
1. Land
2. Personal Real Estate
3. Commercial Real Estate
If you can invest somewhere near a metro or any growing city, any of the above can give you tremendous return ( Commercial real estate is not a very popular investment option there though). However, there is a lot of risks since the market is not very well regulated. Like in India, the recent collapses of big builders (DLF, JP etc) and the hook from apex court has made things little better for the new investors.
In North America, the real estate market is well regulated compared to south Asian countries. You can find the history of a particular area in terms of ROI. And hence decide your budgets too. As a small investor, there are plenty of options.
But if you are not into the investment of physical properties you can try REIT (Real Estate Investment Fund). However, REIT funds are not that great in India and China ( and many other south Asian market). India had a plan to launch a REIT fund in 2018 ( And same year China also promised), but I am not sure what is the situation now. Even if they are available, I am not sure how good.
Real Estate Investment Trusts
In general, two characteristics of real estate as an alternative asset class are a deficiency in liquidity and a lack of direct comparability across properties. The lack of liquidity comes from the fact that the real estate market is a negotiated market with individual transactions that typically occur infrequently.
Real Estate Investment Trusts or REITs were developed in part, to help offer greater liquidity to real estate investors. REITs are generally traded on organized stock exchanges, thus providing investors a mechanism for buying and selling real estate related investments in an efficient manner. Likewise, REITs generally allow investors to acquire diversified exposure to real estate securities, since REITs generally invest in multiple underlying properties.
REITs essentially are a hybrid investment.
The investment category maintains aspects of both fixed income investments (with their reliable interest) and equities (ability to appreciate in value). REITs produce a regular stream of cash, primarily by collecting rents from the numerous tenants occupying the properties they manage. By law, REITs must pay out at least 90% of their taxable income annually as dividends to shareholders. This high dividend payout requirement means a majority share of REIT investment returns come from dividends. This amalgamation of characteristics has historically provided REIT investors with greater higher total returns than many other investments.
According to NAREIT (National Association of Real Estate Investment Trusts), REIT total return performance over the past twenty years has outstripped the performance of the S&P 500 Index, the Barclays U.S. Aggregate Bond Index, and even the rate of inflation. REITs thus provide significant return benefits for medical professionals.
Additionally, the correlation of REITS over the 20-year period from the end of 1991 to year-end 2011 demonstrated REITs maintained a low to moderate correlation with large-cap, small-cap, international stocks, as well as U.S. and international bonds.
For example large-cap equities and equity REITs were only 56% correlated in the same period. This indicates REITs also provide solid diversification benefits. A key portfolio advantage of REIT diversification is the potential to increase long-term returns without taking on additional risk. NAREIT has found that reallocating 10% of a diversified 60/40 portfolio to equity REITs would have improved annual returns by 0.5% per year on average from 1991 to 2011. That could add up to thousands of dollars of additional gains over 20 years without any additional risk.
Any thoughts?
Any thoughts?
63 months ago
All things being equal (which is rare) it is a no brainer question. Stocks will beat real estate in the aggregate every time. So a mutual fund that invests in stocks and generates average returns (low cost index fund) will beat the average real estate investment over a similar time period. One can easily find exceptions on both sides but it becomes a pointless exercise with 20/20 hindsight. Real Estate and Equities move according to different cycles and respond to externalities differently and that makes myopic comparisons fantastic while distorting the long term expected return.
63 months ago
Investment in mutual fund is preferable because diversification and professional money management play important consideration for investor as it offer choice, liquidity and convenience, but charge fees and often require minimum investments.
63 months ago