Owning a property is a dream most of us have, a dream which can often be too expensive or beyond our reach in most cases. Given the real estate boom in the country, investing in property can be an ideal way to make money, but there are inherent risks involved in such investments, which deter a number of investors from directly putting their hard earned money into projects. An alternate to directly investing in property is Real Estate Funds, with investors eligible to enjoy the growth of this sector without directly participating in the process.
What are Real Estate Funds?
A Real Estate Fund is a Sector Fund which predominantly invests in securities which are provided by companies which invest in real estate projects. In essence, it is a fund which provides capital and investment which can be used by the real estate company to develop properties. This fund is managed by professionals, with investments primarily in stocks of such developers. Return on investment depends on the growth of this sector, with the sale and development of properties helping investors get decent returns.
A Real Estate Fund can comprise of investments either directly in real estate companies or in Real Estate Investment Trusts, with the fund managers choosing between these two depending on numerous factors.
Features of Real Estate Funds
Some of the key features which make real estate funds a popular investment instrument are listed below.
- Long-term – Investments in real estate funds are typically for a longer period, with most investors looking to gain long-term returns. This is primarily due to the time associated with developing and selling a property.
- Alternative to buying property – Purchasing property can be a tedious and time consuming process, with real estate funds offering an alternative to physically buying real estate. It not only eliminates the risk of buying property mired in litigations, but also provides returns without the hassle of maintaining it.
- Liquidity – These funds offer a certain level of liquidity to investors, which is not the case with physical real estate. Investors can cash in on their investment at any time, with it possible to sell them in a span of a day or so.
- Risk – Real estate funds come with a different set of risks. While the risk of falling prey to unscrupulous builders or fake property is minimised, there is the inherent risk of collapse of the segment. Being a sector fund, any fluctuations in overall real estate trends could have an impact on the investment.
- Returns – Returns on an investment depend on the growth of the sector, but most funds are known to offer good returns, especially if the fund invests in cities where real estate is a premium.
- Profit sharing – Investments in REITs are typically eligible to get a share of the profits earned by the company, while investments in real estate companies offer a chance for long-term growth.
- Minimal effort – A real estate fund minimises the effort required to purchase a property. Professional fund managers handle the fund, ensuring investors needn’t take additional responsibility. One can enjoy the benefits without having to worry about paperwork, legal status, etc.
- Diverse portfolios – Most real estate funds invest in properties across spectrums, aiming to incorporate residential, commercial, rental and hospitality projects in their portfolio. This, in essence provides investors a chance to reap benefits across growth in different segments.
- Low investment – Purchasing a property is often beyond the reach of most individuals, thanks to ever rising costs. A real estate fund provides people an opportunity to be a part of this sector without paying exorbitant amounts. Individuals can invest sums which they are comfortable with.
- No direct role – Investment in a real estate fund is typically managed by fund managers, which essentially means that an investor has no direct role in determining where his/her money goes. Investors have no stocks in the company nor do they have any voting rights. Also, they have no say in which property an amount is invested in.
- Fees – Most funds charge a certain management and one-time fee, with this amount being equivalent to a fixed percent of the investment amount.
Real Estate Funds and Real Estate Investment Trusts
A common term which is used in conjunction with real estate funds is real estate investment trusts, or REITs. While they sound similar, there is a slight difference between these two, predominantly in the area of investment.
While a real estate fund typically invests in securities of companies which own property (commercial, residential, agricultural or land), a real estate investment trust is an association/trust which owns the land/property. A REIT typically consists of a number of members who pool resources to purchase and develop a property, with these members eligible to earn a dividend. They own a share of the real estate and almost all profit is distributed accordingly.
In simple words, a real estate fund can invest in a real estate investment trust to offer benefits to investors, making a REIT an instrument of investment.
Who should invest in Real Estate Funds?
A real estate fund offers individuals an opportunity to be a part of the growing real estate sector, helping them make money. Just like other funds, this one too comes with its own share of risks and rewards, with individuals expected to make informed decisions. Individuals looking to participate in this sector without physically owning property can consider these funds, especially if they lack the investment to purchase a property themselves.
In addition, this fund is suited to individuals looking at long-term gains, in the range of 3 to 5 years. People looking to make immediate profits might not find it a suitable investment option. Someone who is aware of how the real estate sector works, with an eye on overall growth can benefit from investments in real estate funds.
Popular Real Estate Funds in India
Some of the popular real estate funds in the country are highlighted below.
- Embassy Office Parks REIT
- Mindspace Business Parks REI
- Brookfield India Real Estate Trust
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.