Real Estate vs Mutual Funds - Which is Better for Wealth Creation in India

A Dubai-based engineer messaged our WhatsApp community last month with a question we hear constantly: "My father says buy a flat in Pune. My colleague says mutual funds have better returns. Who's right?"

The answer isn't simple because both can build wealth. But for NRIs managing money from abroad, one comes with far more complications than the other. 

After advising hundreds of NRIs at Belong, we've seen how the "buy property" advice often ignores the real costs, tax changes, and management headaches that only become clear years later.

This guide breaks down every factor that matters, with actual numbers from RBI, SEBI, and recent market data. By the end, you'll know exactly which option suits your situation and how to avoid the mistakes we've seen countless NRIs make.

What Does the 20-Year Data Actually Show?

Let's start with what happened to ₹1 lakh invested 20 years ago in both asset classes.

According to Wright Research, equities turned ₹1 lakh into ₹15.2 lakh over 20 years. The same amount in residential real estate grew to approximately ₹4.4 lakh. Midcap equities performed even better, multiplying capital by more than 25x over the same period.

The Nifty 50 has delivered a CAGR of approximately 12-14% since inception, according to NSE data. Flexi-cap mutual funds have returned 15-16% CAGR over the last 10 years, with top performers like Parag Parikh Flexi Cap Fund and Franklin India Flexi Cap Fund delivering 15.77-15.9% annually (Equitymaster).

Real estate appreciation tells a different story. The RBI House Price Index shows average home prices grew approximately 10% annually between FY 2010-11 and FY 2020-21 (99acres). But here's what most people miss: a significant portion of those returns came in the first five years of that decade. After 2015, appreciation slowed considerably in most cities.

The Global Property Guide reports that the All-India House Price Index rose by just 3.13% year-on-year in Q4 2024-25. When adjusted for inflation, real appreciation was only 0.25%.

👉 Tip: Don't compare headline property prices to your purchase price. Factor in inflation, opportunity cost, and the years of rental income (or lack thereof) to understand your real returns.

The Rental Yield Reality for Indian Properties

One argument for real estate is passive rental income. But the numbers tell a sobering story.

According to Global Property Guide, average gross rental yields across India stand at approximately 4.89% in 2025. This varies significantly by city:

Source: Global Property Guide, May 2025

Mumbai, despite having the highest property prices, offers the lowest rental yields because rents haven't kept pace with capital appreciation.

Here's what these numbers mean practically. A ₹1 crore flat in Mumbai generates roughly ₹30,000-36,000 per month in rent. After deducting maintenance charges (₹3,000-8,000), property taxes, and vacancy periods, net yield drops to 2-3%.

Compare this to a debt mutual fund yielding 7-8% or an NRE fixed deposit yielding 6-7% with zero management hassle.

For NRIs, there's another problem. Finding reliable tenants from abroad is difficult. Many NRIs we speak with have faced non-payment issues, illegal subletting, or tenants who simply refuse to vacate.

The Hidden Costs That Property Advertisements Don't Mention

When comparing real estate vs mutual funds, most people only look at the purchase price. But property ownership in India comes with substantial hidden costs that dramatically affect real returns.

Upfront costs when buying property:

Source: Puravankara, Bajaj Finserv

For a ₹1 crore property in Maharashtra, expect to pay ₹6-8 lakh in stamp duty and registration alone. That's money that generates zero returns.

Ongoing costs that eat into rental income:

• Society maintenance: ₹3,000-15,000 per month depending on amenities
• Property insurance: ₹5,000-15,000 annually
• Repairs and maintenance: 1-2% of property value annually
• Property tax: 0.5-2% of annual rental value
• Vacancy periods: Average 2-3 months between tenants

When we calculate true returns for NRI clients, we often find that after all these costs, rental income barely beats inflation.

Mutual funds, by contrast, have minimal costs. Direct plans have expense ratios of 0.3-1.5% annually. No stamp duty. No maintenance. No vacancy periods.

👉 Tip: Before buying property, create a spreadsheet with all ownership costs over 10 years. Include maintenance, taxes, potential vacancy, and management fees. The true cost often surprises people.

Liquidity: The Factor NRIs Underestimate

Ask any NRI who's tried to sell property in India from abroad. The process typically takes 6-12 months, sometimes longer. Finding buyers, negotiating prices, handling paperwork, managing power of attorney issues, and complying with FEMA regulations all add complexity.

Mutual funds? Redemption takes 1-3 working days depending on fund type:

Source: Groww, SEBI regulations

This liquidity difference matters enormously for emergencies. If your family needs funds urgently, selling property isn't an option. Mutual funds can be redeemed with a few clicks, and money reaches your account within days.

For UAE-based NRIs planning eventual return to India, this flexibility becomes even more valuable. Plans change. Job situations evolve. Having liquid investments means you're never forced to sell property at unfavourable prices.

Entry Barrier: ₹500 vs ₹50 Lakh

The minimum investment required creates a fundamental difference in accessibility.

Property in any metro city requires at least ₹30-50 lakh as down payment, plus another ₹6-10 lakh in transaction costs. Most buyers take home loans, adding interest costs that significantly reduce returns.

Mutual funds start at ₹500 per month through SIP investments. Even a lumpsum investment can begin at ₹5,000 for most funds.

This difference matters beyond just affordability:

Diversification: With ₹50 lakh, you buy one property in one city. The same amount in mutual funds spreads across hundreds of companies, multiple sectors, and different market caps. One bad locality or one problematic builder affects 100% of your property investment. One bad stock affects maybe 2-3% of a diversified fund.

Dollar-cost averaging: SIPs allow you to invest consistently regardless of market conditions, automatically buying more units when prices are low. Property purchases are single, large transactions with no averaging benefit.

No debt required: Most property purchases involve home loans. This adds interest costs (currently 8.5-9.5% in India) and creates EMI pressure for years. Mutual fund investments don't require leverage.

👉 Tip: Many NRIs we advise use a "70-30" rule. 70% in liquid, diversified assets like mutual funds and GIFT City FDs. 30% in property, if desired, after building substantial liquid wealth first.

FEMA Rules Every NRI Must Know Before Buying Property

The Foreign Exchange Management Act governs all NRI property transactions in India. Violating these rules can lead to serious penalties.

What NRIs CAN buy:

• Residential properties (unlimited number)
• Commercial properties (offices, shops, warehouses)
• Properties jointly with other NRIs or immediate family

What NRIs CANNOT buy:

• Agricultural land
• Plantation property
• Farmhouses

Source: HDFC Bank, RBI FEMA Guidelines

The farmhouse restriction catches many NRIs off-guard. Properties marketed as "farmhouses" near cities often sit on agricultural land. Purchasing such property violates FEMA rules and can result in forced sale.

Payment rules: All property payments must come through banking channels. Acceptable sources include:

• Inward remittance from abroad
• Funds from NRE/NRO/FCNR accounts
• Home loans from authorized Indian banks

Cash payments are strictly prohibited and can invalidate the entire transaction.

Repatriation limits: When selling, NRIs can repatriate sale proceeds of up to two residential properties. Repatriation from NRO accounts is capped at USD 1 million per financial year. Funds must be transferred through proper banking channels with Form 15CA/CB compliance.

For detailed FEMA guidelines for real estate, check our comprehensive guide.

The Tax Changes That Hurt Property Investors in 2024

Budget 2024 introduced a significant change that affects property investors, especially those holding for long periods.

Before July 23, 2024:

• Long-term capital gains (LTCG) on property: 20% with indexation benefit
• Indexation adjusted purchase price for inflation, reducing taxable gains

After July 23, 2024:

• LTCG on property: 12.5% without indexation
• No inflation adjustment allowed

Source: Business Today, Finance Act 2024

For properties held many years, this change can actually increase tax liability. Here's an example:

Property bought in 2010 for ₹50 lakh, sold in 2025 for ₹2 crore.

Old regime (20% with indexation): Indexed cost would be approximately ₹85 lakh. Taxable gain: ₹1.15 crore. Tax: ₹23 lakh.

New regime (12.5% without indexation): Taxable gain: ₹1.5 crore. Tax: ₹18.75 lakh.

In this case, the new regime is better. But for properties with lower appreciation, the old regime often produces lower tax.

Transition rule: For properties acquired before July 23, 2024, you can choose whichever calculation results in lower tax.

For mutual funds, the LTCG tax is also 12.5% on gains exceeding ₹1.25 lakh annually. But here's the key difference: mutual funds are far easier to plan around. You can redeem strategically to stay within exemption limits, spread redemptions across financial years, or use systematic withdrawal plans for tax efficiency.

TDS complications for NRIs: When NRIs sell property, buyers must deduct TDS at 12.5% on the entire sale value (not just gains) for LTCG. For a ₹2 crore sale, that's ₹25 lakh deducted upfront, even if your actual tax liability is much lower. Getting refunds requires filing returns and waiting months.

👉 Tip: Apply for a Lower TDS Certificate (Form 13) before selling property. This can reduce upfront TDS to your actual liability, improving cash flow significantly.

Managing Property from Abroad: The Challenges No One Talks About

During our conversations with NRIs, property management consistently emerges as the biggest headache. The challenges include:

Tenant issues:

• Finding reliable tenants without being present
• Handling rent collection and late payments
• Managing tenant disputes and evictions (can take years in Indian courts)
• Dealing with illegal subletting
• Coordinating lease renewals and rent increases

Maintenance challenges:

• Coordinating repairs across time zones
• Verifying that work was actually done
• Handling emergencies like leaks or electrical issues
• Managing society compliance and documentation

Legal and compliance:

• Keeping property taxes current
• Managing mutation and encumbrance certificates
• Handling power of attorney renewals
• Staying compliant with changing regulations

Fraud risks:

• Document forgery (unfortunately common)
• Unauthorized occupation by relatives or strangers
• Title disputes that emerge years after purchase
• Builder fraud in under-construction properties

Professional property management services in India charge 8-15% of rental income. After adding this cost to other expenses, rental yields often drop below 2%.

Mutual funds have none of these issues. Fund managers handle everything. Your only job is to monitor performance and rebalance occasionally.

The GIFT City Alternative: Tax-Free Returns for UAE NRIs

Here's something most NRIs don't know: GIFT City (Gujarat International Finance Tec-City) offers mutual funds with zero capital gains tax for NRIs.

Under Section 10(4D) of the Income Tax Act, investment funds in GIFT City IFSC enjoy complete exemption from Indian capital gains tax. For UAE residents who also pay zero tax locally, this means 100% tax-free returns.

Key benefits:

• No TDS deduction (vs 12.5-20% on mainland mutual funds)
• USD denomination protects against rupee depreciation
• Lower minimum investment: now starting at $500 for some funds
• Tax holiday extended to March 2030

Compare this to mainland mutual funds where NRIs face 12.5% LTCG tax plus TDS complications.

Available GIFT City mutual funds include options like the Tata India Dynamic Equity Fund and DSP Global Equity Fund, offering exposure to Indian and global markets with significant tax advantages.

At Belong, we specialize in helping NRIs access these GIFT City investment options with simple digital onboarding.

Who Should Consider Real Estate Despite the Drawbacks?

We're not saying property is always wrong. It makes sense for some NRIs:

Real estate may suit you if:

• You're planning to return to India and need a home to live in
• You have family in India who can manage the property actively
• You're buying in a high-growth corridor with strong rental demand
• You have significant wealth and want diversification beyond financial assets
• You're inheriting property and want to retain family assets
• You prefer tangible assets you can see and touch

Approach property correctly:

• Budget 15-20% above the quoted price for hidden costs
• Verify land records and title thoroughly (hire a lawyer)
• Check RERA registration for under-construction properties
• Avoid agricultural land or properties with unclear titles
• Have a clear management plan before buying
• Understand tax implications at time of sale

For detailed guidance on property investment for NRIs, including common pitfalls, check our comprehensive guide.

Who Should Prioritize Mutual Funds?

Based on our experience advising NRIs, mutual funds work better for:

Mutual funds suit you if:

• You're focused on building wealth without active management
• You value liquidity and flexibility
• You don't have reliable family in India to manage property
• You prefer systematic investing through SIPs
• You want to avoid loan EMIs and leverage
• You're in the wealth-building phase (under 45)
• You want exposure to India's growth without operational hassles

NRI mutual fund advantages:

• Start with any amount (₹500 monthly SIP)
• Professional management by SEBI-regulated fund houses
• Easy rebalancing and diversification
• Clear tax treatment with simpler compliance
• No FEMA complications for purchases
• No management hassles

For complete guidance on how NRIs can invest in mutual funds, including account setup and fund selection, see our detailed guide.

Decision Framework: 5 Questions to Answer

Before choosing, answer these honestly:

If most answers fall in the "Mutual Funds" column, financial assets likely suit your situation better.

A Balanced Approach for Most NRIs

The smartest NRIs we work with don't choose one or the other. They sequence their investments strategically:

Phase 1: Build liquid foundation Focus on building 2-3 years of expenses in liquid assets. This includes:

• Emergency fund in NRE savings accounts
• Short-term goals in debt funds or GIFT City FDs

Phase 2: Long-term wealth building Invest systematically in diversified equity funds:

• Flexi-cap funds for broad market exposure
• Multi-asset allocation for automatic rebalancing
• International funds for global diversification

Phase 3: Consider property (optional) Only after building substantial liquid wealth:

• Buy property you'd actually live in someday
• Ensure you can pay without stretching finances
• Have clear management arrangements

This sequence ensures you're never forced to sell property at bad prices or take on excessive debt.

Conclusion: Focus on What Actually Builds Wealth

The data is clear. Over long periods, equity investments have significantly outperformed real estate in India. When you add the hidden costs, management hassles, liquidity constraints, and tax complications of property ownership, the gap widens further.

For NRIs especially, the operational challenges of managing Indian property from abroad make financial assets far more practical.

That said, property isn't inherently bad. It's just often a poor first choice for wealth building. Build your liquid, diversified foundation first. Add property later if it genuinely suits your life plans.

The smartest financial decision you can make? Start investing systematically in quality mutual funds while you research and plan any property purchase carefully.

Ready to explore your options?

Join our WhatsApp community where thousands of NRIs discuss investments, taxes, and financial planning daily. Or download the Belong app to explore GIFT City mutual funds and FDs designed specifically for global Indians.

Sources:

• RBI House Price Index: https://rbi.org.in
• Global Property Guide: https://www.globalpropertyguide.com/asia/india/
• AMFI Mutual Fund Data: https://www.amfiindia.com
• NSE Indices: https://www.niftyindices.com
• FEMA Regulations: https://rbi.org.in/Scripts/Fema.aspx
• Income Tax Department: https://incometaxindia.gov.in
• SEBI Mutual Fund Regulations: https://www.sebi.gov.in