Investing in various areas of investments like residential apartments, commercial spaces, and even high-rise office complexes in prime locations like Mumbai, Delhi, or Bangalore is a sure shot to give you a rewarding return. But how can a normal resident like you and me can invest in such huge markets?
With real estate mutual funds, this dream becomes a reality. For instance, you could become a shareholder in a fund that owns a luxury resort in Goa, a tech park in Hyderabad, or a shopping mall in Chennai.
The possibilities are endless!
But it's not just about the potential for high returns and owning a slice of India's vibrant real estate market. Real estate mutual funds also offer the convenience of professional management, ensuring your investment is in the hands of experienced fund managers who understand the nuances of the industry. Moreover, these funds provide liquidity, allowing you to easily buy or sell shares on any business day, unlike the challenges of selling a property.
So, if you're ready to tap into the immense potential of India's real estate sector and embark on a rewarding investment journey, let's dive deep into all you need to know about real estate mutual funds in India!
What are Real Estate Mutual Funds?
Real Estate Mutual Funds are financial securities that are mutual funds investing in securities of real estate companies. If you want to gain access to the real estate sector but do not want to make a bulky investment, you can choose to invest in these funds.
Buying units in Real Estate Mutual Funds can help you diversify your real estate portfolio through investments in residential, commercial and agricultural properties. Like other mutual funds, these are managed by professionals. Returns depend on the real estate sector, interest rates, supply and demand, and other factors.
Real Estate Mutual Funds Vs. REITs: What Is The Difference?
Before diving into the details of what Real Estate Mutual Funds are, let us learn the difference between Real Estate Mutual Funds Vs. REITs, both of which seem like a similar form of investment.
| Particulars | Real Estate Mutual Funds | REITs |
|---|---|---|
| Investment Type | Invest in real estate-related securities like REITs, real estate companies, and developers. | Own and operate income-generating real estate properties. |
| Ownership | Investors own shares of the mutual fund. | Investors own shares of the real estate properties held by the REIT. |
| Minimum Investment | Real Estate Mutual Funds often have lower minimum investment requirements. You can start investing from the minimum amount of Rs.500. | REIT prices due to their stock market listing can be higher. |
| Management | Managed by professional fund managers. | Managed by the REIT company itself. |
| Diversification | Offers diversification across various real estate securities and geographies. | Provides specific exposure to real estate properties, often specializing in certain property types. |
| Liquidity | Shares can be bought or sold at the fund's NAV on any trading day. | Shares are traded on stock exchanges, offering liquidity throughout the trading day. |
| Income Potential | Depends on the performance of the underlying securities in the fund. | Potential for rental income and dividends from the properties owned by the REIT. |
| Price Fluctuation | NAV of the mutual fund can change based on the performance of the underlying securities. | Share prices can fluctuate on stock exchanges based on market demand and supply. |
| Taxation | It depends on the investor's individual tax situation. | REITs must distribute a significant portion of taxable income to shareholders. Taxation may vary for investors. |
| Market Exposure | Performance depends on the overall market performance of the underlying securities. | Performance is influenced by both the real estate market and the stock market. |
Top-Rated Real Estate Mutual Funds
Here are 3 reputable real estate mutual funds in India that have received high ratings:
Kotak International REIT FOF: Kotak International REIT Fund of Funds (FOF) is an investment product offered by Kotak Mahindra Asset Management Company. It has a strong track record and is known for its experienced management team. The minimum investment for this fund is Rs.5000.
PGIM India Global Select Real Estate Securities FOF- Regular Plan- Growth: TAs a growth-oriented fund, the PGIM India Global Select Real Estate Securities FOF focuses on capital appreciation over the long term. The fund aims to benefit from the growth potential and income generation opportunities offered by global real estate markets.
Mahindra Manulife Asia Pacific REITs FOF- Direct Plan-Growth: By investing in this FOF, individuals can indirectly participate in the growth and income potential of the Asia Pacific real estate sector. The fund's portfolio comprises a diversified selection of REITs that own and operate various types of income-generating properties such as commercial buildings, shopping malls, hospitality assets, and more.
Performance Comparison of Real Estate Mutual Funds
Analyzing the performance of real estate mutual funds is crucial when selecting the right investment option. It helps determine the competence of the fund management team in generating returns and managing risks associated with real estate investments. Examining performance over different time periods allows investors to assess the fund's consistency in delivering returns, which is important for long-term investment objectives.
Performance analysis helps compare a fund's returns against relevant benchmarks, such as real estate indices, to gauge its ability to outperform the market. So what are the factors that you as an investor should while analyzing the performance of a specific fund? Here is a list.
Annual Returns: Annual returns measure the percentage change in a fund's net asset value (NAV) over a given year. They provide insights into the fund's ability to generate positive returns for investors. Higher annual returns indicate better performance.
Risk Metrics: Consider risk measures such as volatility, standard deviation, and downside protection to assess the fund's risk management capabilities.
Consistency: Look for consistent returns over multiple time periods to evaluate the fund's ability to perform consistently, indicating stability and reliability.
Expense Ratio: Assess the expense ratio, as lower fees can positively impact net returns and enhance long-term performance.
How to Invest in Real Estate Mutual Funds?
Investing in real estate mutual funds in India is a relatively straightforward process. Here's a step-by-step guide on how to start investing in real estate funds and some tips for selecting the right funds based on individual goals:
Step 1: Determine Investment Goals and Risk Tolerance Define your investment objectives, whether it's long-term capital appreciation, regular income, or a combination of both. Assess your risk tolerance to identify the level of risk you are comfortable with.
Step 2: Research Real Estate Mutual Funds Conduct thorough research on various real estate funds available in the market. Consider factors such as fund performance, expense ratio, fund manager's experience, portfolio composition, and investment strategy.
Step 3: Open an Investment Account Choose a reputable financial institution or online investment platform that offers real estate mutual funds. Open an investment account with the chosen provider, following their account opening process.
Step 4: Complete the Necessary Documentation Provide the required documents to fulfill the account opening process. This typically includes identity proof, address proof, and bank account details.
Step 5: Determine Investment Amount: Decide on the amount you want to invest in real estate mutual funds. Consider your financial situation and invest an amount that aligns with your investment goals and risk tolerance.
Step 6: Select the Right Real Estate Mutual Funds Once you're done with the research, select the real estate funds that align with your investment objectives and risk tolerance. Make sure you consider factors such as fund performance, expense ratio, investment strategy, and the fund's fit within your investment portfolio.
Step 7: Submit Investment Order Once you have chosen the real estate funds, submit an investment order through your investment account. Specify the fund name, investment amount, and any other required details.
Tips for Selecting the Right Real Estate Mutual Funds:
We have gathered 5 tips to provide a starting point for selecting real estate funds.
Define Your Investment Goals : Understand your investment objectives and choose funds that align with your specific goals, whether it's capital appreciation, income generation, or a combination.
Consider Risk and Diversification: Assess your risk tolerance and select funds that offer a risk profile suitable for you. Look for funds that provide diversification across different types of real estate assets and geographical locations.
Evaluate Fund Performance: Review the historical performance of funds, comparing their returns against relevant benchmarks and considering consistent returns over multiple time periods.
Research Fund Managers: Consider the experience and track record of the fund managers. Look for managers with expertise in the real estate sector and a history of successful performance.
Review Expenses: Compare expense ratios among funds and aim for funds with lower expense ratios, as this can have a positive impact on your overall returns.
If needed, consult with a financial advisor who specializes in real estate investments to gain additional insights and guidance in selecting the right funds.
How Are Real Estate Mutual Funds Taxed in India
In India, real estate funds can offer certain tax advantages for investors. Before that let us see how Real Estate Mutual funds are taxed.
Long-term capital gains on listed units of real estate mutual funds in India or REITs held for more than 36 months are currently taxed at a rate of 20% with indexation benefits, potentially resulting in lower tax liability.
If the units are held for less than 36 months, the gains are considered short-term capital gains and are taxed at the individual's applicable income tax rate.
Strategies to Maximize Retirement Savings:
To save more for your retirement periods, you can consider implementing these strategies.
Investing in real estate mutual funds or REITs through tax-advantaged retirement accounts, such as the National Pension Scheme (NPS) or the Employees' Provident Fund (EPF), can provide tax advantages. Contributions to these retirement accounts may be tax-deductible, and the growth within the accounts is typically tax-free, allowing for potential tax savings on real estate mutual fund investments made through these vehicles.
Explore the option of investing in real estate mutual funds or REITs through tax-advantaged retirement accounts, such as the NPS or EPF. By utilizing these accounts, you can benefit from tax advantages, such as tax-deductible contributions or tax-free growth.
Consider setting up a SIP to regularly invest in real estate mutual funds or REITs. This strategy allows for disciplined investments over time, potentially taking advantage of rupee-cost averaging and long-term compounding.
If the real estate mutual fund or REIT offers a dividend reinvestment plan (DRIP), consider reinvesting dividends instead of receiving them in cash. By reinvesting dividends, you can potentially benefit from compounding returns over time, enhancing your retirement savings.
Best Real Estate Mutual Funds for Retirement and Long-Term Growth
To save your search for the best Real Estate Mutual Funds for Retirement and Long-Term Growth in India, we have gathered some of the best funds in India.
- Mahindra Manulife Asia Pacific REITs FOF fund
- Quant Infrastructure Fund
- Kotak International REIT FOF fund
- SBI Infrastructure Fund
- Sundaram Infrastructure Advantage Fund
- L&T Infrastructure Fund
- Invesco India Infrastructure Fund
- Tata Infrastructure Fund
These funds offer the potential for long-term growth and can be considered for retirement planning purposes.
Conclusion
In light of these points, we hope you clearly understood all about real estate mutual funds. With their potential for long-term growth, diversification, and tax advantages, real estate mutual funds can be a valuable addition to an investment portfolio. However, it's important to conduct thorough research, align the funds with individual goals and risk tolerance, and seek professional advice when necessary.
By considering real estate mutual funds as part of a comprehensive investment strategy, investors can potentially benefit from the growth and income potential of the real estate sector while enjoying the advantages offered by mutual fund investments.
