What Are Real Estate Mutual Funds?
Real estate mutual funds, or REIT mutual funds, are investment instruments that pool investors’ money to invest in shares of businesses in developing residential and commercial real estate. Such mutual funds mirror the working of any other mutual fund that invests in equities.
However, instead of offering company ownership, these mutual funds offer proportionate ownership of an income-generating real estate asset to retail investors. Expert fund managers manage the investments in REIT mutual funds to ensure they provide good returns to the investors and mitigate risk exposure.
All real estate mutual funds have a sponsor or financial entity that backs their operations and transfers ownership of assets to the REIT in exchange for its units. Investors can invest a predetermined amount in these mutual funds and generate earnings as capital appreciation and dividends.
Who Should Invest In Real Estate Mutual Funds?
Real estate mutual funds in India have become the most invested financial instruments for investors who do not have high capital to buy real estate physically but want to profit from rising prices. REITs are a great way for retail investors to invest systematically in real estate by investing a predetermined sum of money every month. You can invest in REIT mutual funds if your investment strategy includes any of the below criteria.
● Real Estate Investments: Numerous sectors are available to invest and earn profits, such as equities, derivatives, currency, etc. However, some investors want to profit from the rising prices of real estate in India. If you want to invest in the real estate sector, you can look towards REITs.
● Low Capital: Unlike buying real estate physically, real estate funds do not require high capital to own real estate assets. Investors can start investing and owning real estate assets with a monthly investment as low as Rs 5,000. Hence, real estate MFs are an ideal investment option for investors low on capital.
● Inflation: Negative economic factors such as inflation can result in a sharp fall in the value of asset classes such as equities, forcing investors to lose money. However, investing in REITs and owning real estate can help investors protect their investments against inflation due to a steep rise in real estate prices.
Features of Real Estate Mutual Funds
Here are the features of real estate funds that make investment instruments a viable option in the long term.
● Flexibility: Investors can utilise REIT mutual funds to systematically invest and own real estate assets by financing a monthly amount as low as Rs 5,000. A similar feature is unavailable with buying real estate physically without taking out a property loan and paying monthly EMIs. Hence, such mutual funds allow investors with low capital to invest in the real estate segment.
● Stable Returns: REIT investments provide an ideal way for investors to allocate their capital in real estate to earn stable returns. It can work as passive income for investors who want to profit from rising real estate prices.
● Diversification: One of the best features of REIT mutual funds is their diversification factor which ensures investors can lower their risk profile. REITs provide sufficient diversification by investing the pooled amount across various real estate entities.
Taxability Of Real Estate Mutual Funds
Since REITs are income-generating financial instruments for investors, the Indian government, with the Income Tax Department, requires the investors to pay taxes on their earnings and income. However, they have created some guidelines to charge tax from REIT investors. Here are the taxability criteria for real estate funds.
● Investors are liable to pay a 15% short-term capital gains tax on the amount generated by selling the investments if held for less than one year.
● The investors are liable to pay a 10% long-term capital gains tax on the amount generated by selling the investments if held for more than 36 months.
● The interest income generated through the REITs is taxable according to the applicable income-tax slab.
● The taxability of the dividend income is taxable in the hands of the investors if the company has obtained a special tax concession.
● The REIT investors are not liable to pay tax on the income from the amortisation of SPV.
Risk Involved In Real Estate Mutual Funds
Every financial instrument contains a certain level of risk as the value is ascertained through various internal and external factors that are dynamic and volatile. Similarly, REIT mutual funds can be risky based on the following factors.
● Interest Rate Risk: The Reserve Bank of India constantly changes the key interest rates in India to manage the money flow. Although RBI decides to position the Indian economy better, the change in interest rates heavily affects the market borrowing rates, creating interest rate risk for the investors. Thus, investors must be careful when investing in REITs if the borrowing rates are high.
● Investment Decision: One of the most significant risks associated with REITs is the lack of direct say of the investors in the management of the REITs. Fund managers are responsible for managing such funds, so investors can not interfere in decision-making. If the fund managers commit an investing or management mistake, it can hurt the investment value of the investors.
Advantages of Real Estate Mutual Funds
Real estate mutual funds are a great way for investors to invest their money systematically in India's ever-booming real estate segment. Here are some of the advantages of real estate MFs that make them an ideal investment option for investors:
● Value Investing: The investments made by investors in such mutual funds are for the long term, which provides an ideal way to mitigate the effects of a temporary volatile market. Since the investments are for the long-term, investors can protect their investments’ value.
● Ideal Alternative: REITs are a great alternative to buying property without going through a tedious and time-consuming process. Investing in REITs provides an effective way to own real estate systematically and reap the benefits, such as returns and capital appreciation, without maintaining the assets.
● Liquidity: Unlike physical real estate, which may take months to sell, investors can sell their REIT investments within days to exit the market and realise cash. Investors can sell their investments at any time and find buyers instantly.
Best Real Estate Mutual Funds
Investments in real estate can prove to be highly fruitful if the investors make the investments based on extensive research about the best REIT mutual funds available for investing. The quality of the infrastructure and the overall demand are key factors that make a company that issues REIT mutual fund units a viable investment.
However, as numerous companies have created REIT mutual funds, you must invest after knowing the best real estate mutual funds. Here is a list of top real estate funds where you can invest to profit and earn a steady income over time.
1. Embassy REIT
The first listed REIT in India, it has the largest infrastructure in Asia. The REIT is sponsored by Embassy & Blackstone and operates and owns 42.4 million square feet of land, including six hotels, twelve office parks, and a 100 MW solar power plant.
The company’s infrastructure comprises a 33.4 million square feet operating area and provides an ideal investment avenue in the form of a mutual fund as it has over 87% occupancy. The company has offices in major cities such as Pune, Bangalore, Mumbai, and the Delhi region, which witnesses many corporate clients.
2. Mindspace REIT
Mindspace REIT is a mutual fund sponsored by K Raheja Corp Group and has a strong portfolio of office spaces in various cities such as Chennai, Hyderabad, Mumbai, and Pune. The total leasable area with the company is 31.9 million square feet with over 86.9% occupancy.
The company was founded in 2020 and is known to develop commercial and real estate properties in India. In the last four years, the company has posted revenue growth of 6.9% CAGR to Rs 1,750 crores, making the REIT an ideal investment option for investors who are looking for capital appreciation with low-risk exposure.
3. Brookfield India REIT
Brookfield India was founded in 2020 and has a diversified real estate portfolio of grade-A offices and buildings across various Indian cities such as Gurugram, Mumbai, Kolkata, and Noida. The company is sponsored by Brookfield AMC and is India’s only company that is an institutionally managed commercial real estate entity.
The total infrastructure portfolio of Brookfield India comprises 18.7 million square feet, with 4.4 million square feet remaining to be developed. In quarter two of FY22, the company's revenue was up by 43.4% to reach 303.6 crores, backed by the acquisition of Candor Techspace N2 in December 2021.
The above-mentioned three real estate mutual funds in India are the best REIT mutual funds In India that offer a host of features and benefits to ensure capital appreciation and an effective avenue to earn a steady income through representing the ownership of real estate assets. Since the sponsors of the REITs are the most sought-after financial entities, the risk exposure for the REITs is lower, with a high growth potential.
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