scorecardresearchMutual funds vs REITs: Debate continues over risk & returns

Mutual funds vs REITs: Debate continues over risk & returns

Updated: 19 Apr 2023, 08:27 AM IST

In mutual funds, the risk evaporates with time; the downside to any mutual fund investment is not permanent. Comparatively, the risk factor in REITs is too high. You never know what will hit the market for people to be rid of their real estate investments and run away.

Mutual funds versus REITs - Risk versus returns

Mutual funds versus REITs - Risk versus returns

Those interested in availing of the benefits of real estate stocks can now rejoice as the NSE Indices Limited launched the country’s first-ever Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) Index. Both these indices launched will track the performance of REITs and InvITs publicly listed and traded on the NSE.

The launch of these indices brings forth one’s attention to buying real estate stocks or allocating a part of your earnings to real estate investments as an alternative money-making opportunity. This is different considering how an increasing number of people show interest in putting money into mutual funds.

Mutual fund investments across various market capitalizations are designed to suit myriad financial goals over different time horizons. For example, if you are willing to go long for two to three decades, equity investments are indeed the best way to not only earn good returns. Liquid funds are best suited to those looking for short-term financial solutions.

With the market behaving in an inexplicable rangebound fashion and expect to soon go bearish owing to the ongoing effect of recession and inflation and simmering geopolitical tensions, many investors are looking for ways beyond equity instruments to grow their money, thereby, helping them create a corpus in the long run. Real estate prices are booming, and people are inclined to take home loans to buy a home of their choice. This is evident from the increasing number of credit facilities and loans by banks and financial institutions.

The need and urge to invest for a better future have put many people in a quandary as they are unable to decide between mutual funds and real estate investments. “Where should I put my money? Which of these will fetch me better yields?” are questions that are often asked but left unanswered either due to confusion or lack of information on the same.

For the unversed, mutual funds invest in stocks, bonds and other monetary instruments. Real estate investment trusts (REITs) are institutions that manage properties including commercial buildings, apartments, or hotels without having an ownership stake in them. The idea of investing is to first check the kind of investment it is and how long you wish to stay invested.

A tete-a-tete with some personal financial analysts reveals the pros and cons of every investment and why one may be better than the other for some investors.

Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor) said, “In India, REITs and InvITs are comparatively new investment vehicles and are yet to mature as a space. And given the limited number of individual REITs and InvITs in India, it was difficult for any investor to build a diversified portfolio of real estate and infrastructure projects till now. But with the launch of this new NSE REITs & InvITs Index, this lack of diversification angle is set to change. While there are still no funds tracking this new index, as and when any AMC launches an index fund or an ETF tracking this index, it could be a reasonably good option for investors looking to diversify their portfolio. But both REITs and InvITs should be part of investors’ alternative asset buckets and get allocation accordingly. It should not be treated as a core asset class for most investors’ financial investment portfolio which should comprise primarily of equity and debt.”

“What is a good investment option depends on the risk appetite of the investor. A mutual fund, REIT and InvITs at end of the day are all investment vehicles with underlying asset classes that are financial assets, real estate assets and infrastructure projects respectively, with each asset class having its own risk and return profile. Mutual funds are a better option for investors with a low-risk appetite, given that real estate is a riskier asset class. However, for an investor with a higher risk tolerance, real estate as an asset class may add value to his overall portfolio,” added Vivek Iyer, Partner, Grant Thornton Bharat.

Rishabh Parakh, a chartered accountant and personal finance expert and Chief Play officer of NRP CAPITALS shared, “Both mutual funds and REITs are distinct asset classes; one should invest in REITs to add to their real estate investment portfolio and, especially, if they can’t or don’t want to put the money in real estate which is always the case. REITs work like a mutual fund investment wherein you can invest as low as 2 lakhs up to any amount to buy real estate. So, it’s a great medium to allocate towards real estate like a mutual fund but in India, the REITs haven’t taken off as well like it is globally. One can start with a smaller amount, understand how it works and then increase it accordingly. However, you must do proper risk profiling before putting your money into it. Apart, InvITs are infra investments, albeit at a lower amount. The best idea is to opt for a good hybrid option to benefit from the investments.”

Various factors affect investments’ performance. While talking about the market, experts and analysts maintain, “What comes down will eventually go up. Just give it some time”. However, the risk factor in REITs is too much to handle, especially, during prolonged economic slowdowns when inflation and economic downturn force people to reconsider their real estate investments and look for less risky options.

Understanding REITs
First Published: 19 Apr 2023, 08:27 AM IST