India is the home to high-growth investment opportunities, and REITs and mutual funds are some of the most mainstream and important options with the potential to deliver significant returns. A lot of people are confused between these options and have a hard time deciding which one to choose. In this article, we’ll explore the details of REITs and mutual funds, and find which one is a better investment for NRIs.
Understanding REITs
What Are REITs?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. REITs allow investors to earn dividends from real estate investments without having to buy, manage, or finance properties on their own.
Key Features of REITs:
- Invest in commercial real estate like office spaces, shopping malls, or warehouses.
- Traded on stock exchanges like equity shares.
- Offer liquidity compared to direct real estate investments.
- Provide regular earning in the form of rental income.
Benefits of Investing in REITs:
- Regular Income: REITs distribute at least 90% of their net income as dividends, offering a steady income stream.
- Diversification: Exposure to real estate without property ownership.
- Liquidity: Unlike physical real estate, REITs are listed on stock exchanges, which makes them liquid.
- Regulated Framework: REITs in India are governed by SEBI.
Challenges of Investing in REITs:
- Limited Growth Potential: REIT returns come from rental income, which may not grow significantly over time.
- Market Volatility: REIT prices are affected by stock market fluctuations, making them less stable.
- Taxation: Dividend income from REITs is taxable in India, which can affect net returns.
- Concentration Risk: REITs are focused on real estate, thus lacking diversification.
Understanding Mutual Funds
Mutual funds pool money from multiple investors to invest in a diversified portfolio of securities like stocks, bonds, or other assets. They are managed by fund managers who aim to generate returns based on the fund’s objectives.
Key Features of Mutual Funds:
- Diversified investment across various asset classes.
- Available in various categories like equity, debt, hybrid, and thematic funds.
- Offer systematic investment plans (SIPs) for disciplined investing.
- Provide flexibility to invest in Indian and international markets.
Benefits of Investing in Mutual Funds:
- Diversification: Mutual funds spread investments across multiple sectors and asset classes, reducing risk.
- Flexibility: NRIs can choose from a wide variety of funds based on their financial goals and risk appetite.
- Professional Management: Fund managers with expertise ensure optimal portfolio performance.
- High Growth Potential: Equity mutual funds, in particular, offer significant growth over the long term.
- Tax Efficiency: Certain mutual funds offer tax-saving benefits under Section 80C, while long-term capital gains (LTCG) are taxed at favorable rates.
- Ease of Investment: NRIs can invest in mutual funds through NRE or NRO accounts.
Challenges of Investing in Mutual Funds:
- Market Risk: Returns depend on market performance, which can be unpredictable.
- Currency Risk: Fluctuations in exchange rates can impact repatriated returns.
REITs vs Mutual Funds: A Comparative Analysis
| Features | REITs | Mutual Funds |
| Diversification | Limited to real estate | Across sectors, regions and assets |
| Liquidity | Very High | High (redeemable on demand) |
| Income Potential | Price appreciation + regular dividends | Price appreciation + dividends |
| Risk | Sector-specific risk | Diversified, lower risk |
| Tax Implications | Dividend income taxable | LTCG / STCG |
| Growth Potential | Moderate | High |
| Ease of Investment | Requires DEMAT account | Can invest via NRE/NRO account |
Why Mutual Funds Are a Better Choice for NRIs?
1. Diversification
While REITs are limited to the real estate sector, mutual funds offer a diversified portfolio that includes equities, bonds, and even global markets. This diversification reduces risk and provides better returns.
2. Better Growth Potential
Stocks have performed better than most asset classes over the long term. For NRIs looking to grow their wealth, equity mutual funds provide a better opportunity to benefit from India’s economic growth story.
3. Flexibility and Accessibility
Mutual funds cater to various financial goals, risk levels and time horizons. Whether NRIs aim for short-term gains or long-term wealth creation, there’s always a variety of mutual funds made to serve them and fulfil their needs.
4. Tax Efficiency
Mutual funds are more tax-efficient than REITs. Long-term capital gains (LTCG) on equity mutual funds are taxed at 12.5% (above ₹1.25 lakh), and there are many mutual funds offering tax benefits, which reduce tax burden.
5. Global Investment Opportunities
NRIs can invest in Indian mutual funds that include international assets, allowing them to access global markets alongside Indian investments.
6. Ease of Management
Mutual funds do not need to be managed or looked into regularly. Moreover, fund managers make investment decisions on behalf of investors, making them ideal for NRIs who do not have time to manage their investments or who cannot invest on their own.
Conclusion
For NRIs, both REITs and mutual funds offer unique benefits. However, when it comes to diversification, growth potential, tax efficiency and ease of investment, mutual funds are better for those investing for the long run. They allow NRIs to participate in India’s growth story and provide the flexibility to invest in assets that can serve their needs as per their financial goals.
Whether you’re planning for long-term wealth creation, children’s education or retirement, mutual funds offer a lot of growth and flexibility to achieve your financial goals. As an NRI, investing in mutual funds can be an important step towards building a more secure financial future. Download the SBNRI App and start growing your wealth with mutual funds!
SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.
Frequently Asked Questions
Which is more tax-efficient for NRIs: REITs or mutual funds?
When it comes to mutual funds vs real estate investments, mutual funds are better when it comes to saving taxes. Generally, mutual funds are more tax-efficient because they offer lower LTCG tax rates and indexation benefits for debt funds.
Which is riskier: REITs or mutual funds?
REITs carry sector-specific risks tied to real estate, while mutual funds diversify across sectors, reducing the risk for investors. This makes them an attractive option for NRIs.
Is it easier for NRIs to invest in REITs or mutual funds?
Mutual funds are easier to invest in for NRIs since investing in mutual funds can be done from NRE or NRO accounts, while investing in REITs requires a Demat account.
