Real estate vs mutual funds: comparing true returns

The comparison most people make

"My parents bought this flat for ₹20 lakh and it is worth ₹1.2 crore now." That sentence is the usual case for property, and it compares two prices decades apart. It says nothing about what was paid along the way, what the money could have earned elsewhere, or how much of the gain survives a sale.

A fair comparison puts both assets on the same footing: money in, money out, on the dates they actually move, after costs and tax. That gives an annual rate of return for each, and those two numbers can be compared.

What a flat really costs to own

The purchase price is only the first line. The rest, roughly in order:

Against those costs, a let-out flat earns rent. In Indian metros, gross rent usually runs at about 2–4% of the property's value a year, the range our rent vs buy guide uses. Take out maintenance, property tax and vacancy, and the net yield is often closer to 2%. The rental yield calculator turns any asking price and rent into this figure.

A worked example

Take a ₹1 crore flat, bought for cash, held ten years and sold. The assumptions below are illustrative, not forecasts:

• Stamp duty and registration of 7%, so ₹1.07 crore goes out on day one.
• Net rent of 2% of the value each year, rising with the price.
• Selling costs of 2%, and 12.5% tax on the gain over the ₹1.07 crore cost.
• Rent counted before income tax, which flatters the flat.

What the flat returns a year, depending on how fast its price rises:

Now put the same ₹1.07 crore into an equity fund for ten years, and pay 12.5% tax on the gain above the ₹1.25 lakh annual exemption at the end:

Two things stand out. First, the flat's return lands close to its price growth, because the 2% net rent is roughly cancelled out by the entry and exit costs over a decade. Second, the flat would need its price to compound at about 8–9% a year, every year, just to match a fund earning 10%, and its rent here is still untaxed.

What funds have actually done

The fund rates above are assumptions too, so here is history. From the daily NAVs we hold, as of 1 October 2026, Direct Growth equity funds with a full ten-year record returned:

These include only funds that still exist, so closed or merged funds are left out. The ride was not smooth either. The median large-cap fund's worst fall from a peak in its history was 35%, and the median flexi-cap fund's was 28%. Property prices do not show falls like that day by day, but that is partly because a flat has no daily price, not because its value never drops.

Where property has a real edge

The arithmetic above is not the whole story, and it is unfair to property in three ways.

Leverage. Most flats are bought with a home loan. If prices rise, a 20% down payment can earn a much higher return than the property itself. If they fall or stay flat, the same loan turns a modest loss into a large one, and the EMI is due either way. Leverage raises the risk as much as the return.

You can live in it. For a home you occupy, the "rent" is the rent you no longer pay, and the security of tenure has value no spreadsheet captures. That is a lifestyle decision first, which the rent vs buy calculator helps price.

Behaviour. A flat is hard to sell on impulse, so people hold it through bad years. Many fund investors stop their SIPs or sell in a fall and earn less than the fund did. The illiquidity that hurts property in an emergency also protects some investors from themselves.

Where funds have the edge

Liquidity and divisibility. Fund units can be sold in part, in a day or two. A flat is sold whole, over months, at a price set by whoever turns up.

Diversification. One flat is one building in one locality with one tenant. A flexi-cap fund holds dozens of companies, and the same ₹1 crore can be split across equity, debt and gold.

Lower friction. A Direct plan's annual cost is a fraction of the 7% stamp duty and 2% exit cost a flat carries before it earns anything.

Simpler tax. Fund gains are taxed when you sell; rent is taxed every year at your slab rate. For property, the property capital gains calculator shows whether the old indexed route or the flat 12.5% is cheaper for a pre-July 2024 purchase.

A fairer way to decide

Before buying a flat as an investment, write down four numbers: the all-in purchase cost, the realistic net rent, the price growth you are assuming, and the cost of selling. Run the return. Then ask whether you would accept that rate from a fund you could not sell for months and could not split.

If the goal is exposure to rented property without buying a whole flat, there are listed routes; we cover them in REITs: commercial real estate with small capital.

This post is for education only and is not investment, tax or legal advice. The worked example uses assumptions, not forecasts, and past returns do not predict future returns.