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Real Estate vs. Mutual Funds

By PolicyBazaar

Invest smart today for a better tomorrow

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Very often investors are perplexed in choosing the right investment vehicle in the UAE. With such a wide variety of investment tools, easy access to banking and online services it becomes even more difficult to choose the correct investment vehicle.

Traditional modes of investment like real estate and fixed deposit have always been lucrative investment options in the UAE. Furthermore, the rapid growth of the country’s economy has led to the development of a global business hub which has dramatically increased the investment cost for real estate in the UAE. Mutual funds, on the other hand, are easy to handle and come with a low initial investment cost which makes it one of the most popular investment options not just in the UAE but all across the globe. 

In order to extract the maximum return out of your investment, you should be aware of all the pros and cons of the chosen investment vehicle. If you are looking forward to building a strong investment portfolio but you are confused between real estate and mutual funds you just at the right place. This quick read will help you to choose between real estate and mutual funds. 

Real Estate

Real estate has been one of the oldest and most reliable investment vehicles. It is considered as an asset with the highest rate of returns which is practically unmatched by other asset classes. The demand for real estate in the UAE has grown substantially and statistics indicate that prices have always increased which makes real estate a reliable investment choice in the UAE.

Real estate investments in the UAE allow investors to generate a steady flow of income and are a good choice for the long term. Moreover, these are a tangible investment vehicle that offers sizeable returns with annual appreciation in the price in normal circumstances. Real estate investments in UAE allow the investor to avail of bank loans easily that enhances its overall value as an investment vehicle. 

Mutual Funds

Mutual funds are relatively newer investment tools when compared to traditional investment options like fixed deposits and real estate. A mutual works by collecting funds from multiple investors and allocating the collected capital into the different market-based instruments to reap returns. Typically the pool of money is invested in equity funds or debt funds.

Returns received from mutual fund investments are dependent on market situations and therefor these investment tools are prone to high degrees of risk. SIP or systematic investment plan approach allows investors to contribute small amounts periodically as per convenience. SIP approach makes it easier for all classes of investors to invest and build a corpus for their futures.

Mutual funds are managed and controlled by an expert professional known as a fund manager. The primary job responsibility of a fund manager is to track the performance of the funds and choose the right security to allocate the fund in order to maximize returns. According to statistics equity-based mutual funds in UAE yield higher rates of return in the long term when compared to real estate.

In order to make a valid comparison between real estate and mutual funds, we will be looking upon the following factors- 

Consistency

Consistency in maintaining the value of the assets and maximizing rates of return is a crucial factor to consider before making any investment based decision. Real estate investments are often inconsistent as the pricing tends to rise or drop based on the development factor. Typically prices of property rise with development in the surrounding areas. Contrary to the common belief the prices of property are not always on a rise, it might fluctuate based on the development factor.

Mutual funds when compared to real estate show better consistency in terms of maintaining the value along with maximizing the returns. Mutual funds in UAE provide inflation-beating returns within the past few decades which has eventually led to an increase in their popularity. Mutual funds in UAE provide returns by investing in the market-based instrument which makes them prone to risk.

Performance

Real estate investments are considered similar to fixed deposits because the returns obtained are almost the same. On the other hand, mutual funds in the UAE are suitable for investors looking forward to generating and accumulate wealth in the long run. Compounding improves the value of mutual fund investments and provides higher returns when compared to traditional real estate investments. Mutual funds tend to perform satisfactorily even during phases of inflation which is not the case with real estate investments. 

Liquidity

Most of us have encountered situations where we are in urgent need of cash and the only way out is to liquidate existing investments in the UAE. Liquidity is a vital factor and investors should lay emphasis on it while choosing their investment vehicle.

Real estate investments are a bit difficult to liquidate in comparison to mutual funds due to the fact that there is no market that allows investors to complete the transaction. Contrary to this mutual fund investments are highly liquid in nature and investors can convert funds into cash within a period of maximum 72 hours. 

Returns

Return is the most important factor when it comes to any form of investment. According to statistics, real estate provides 8 to 12 % of returns annually whereas mutual funds provide 6 to 18% of returns as per the market situation. 

Monitoring

Real estate investments in the UAE are considered prone to risks because investors cannot track the performance of their assets. The inability to track the performance of your investment might result in disputes if your investment is in partnership. Contrary to this investors can periodically track the performance of their funds online which eventually reduces the probability of losing the capital.

Ease of Investment

Real estate investments require a lot of paperwork, approvals, permissions, etc. Furthermore, investors are supposed to pay extra for registration and possession which is time-consuming. Mutual fund investments, on the other hand, are much easier to handle. Investors can enroll for a SIP program under which a fixed amount will be auto-debited every month as an investment. 

Conclusion

Both modes of investment be it real estate or Mutual Fund have their own pros and cons. Real estate provides a sense of financial cushioning while mutual funds provide multiple opportunities to reap high profits in a short span of time.

The first step towards making financial investments is assessing investment goals and the time frame for which the investor is planning to make the investment. Based on long-term and short-term investment goals and financial portfolio investors can analyze and choose the right investment vehicle.