Physical Real Estate or Real Estate Mutual Funds?

Real Estate

If you already have a house of your own and are desirous of making further investment in real estate solely with a profit motive, it is advisable to go through the mutual fund route. Real estate in the physical form suffers from a lot of disadvantages.

  • Risk of loss due to fire and other natural calamities and hazards.
  • High ticket size- The cost of even a small piece of land could run in to lakhs of rupees. Real estate mutual funds ( REMF) require relatively lesser minimum investment.
  • Concentration risk – It is very cumbersome to maintain a diversified portfolio of real estate through multiple purchases. In a REMF, the fund manager takes care of this.
  • Risk of encroachment- This applies especially to vacant plots of land which need to be guarded and visited regularly.
  • Illiquid- Physical real estate investments are not as liquid as other investments like deposits, mutual funds or gold. Deals could take a long time to get executed.
  • Lack of transparency – The prices of real estate are not standardized and lack transparency. REMFs are valued through regularly published NAVs
  • High transaction costs – Real estate deals – buying and selling involve high transaction costs like stamp duty and registration charges.
  • Owning more than one house has greater tax liabilities.

These reasons make Real Estate Mutual Funds with a professional manager, flexible entry amounts and transparent prices a superior investment option.

The following are detail of some of the popular Real Estate Mutual Funds in India :

  1. Kotak Realty Fund – Closed ended fund started in 2005 for a term of seven years and the target segment are corporates and High Networth Individuals.
  2. HDFC India Real Estate Fund – Closed ended with a minimum initial requirement of Rs 5 crores.
  3. Anand Rathi Real Estate Opportunities Fund – Closed ended fund which mainly focuses on acquiring secured rental income real estate assets with good quality tenants.
  4. IL & FS Realty Fund – An aggressive private equity fund which seeks to deliver a compounded annual growth of 25 %.
  5. ICICI Ventures – Seeks to invest in commercial and residential real estate projects in the developing cities in India.

Though real estate mutual funds haven’t yet really taken off in India, they have a huge future potential. Investors wanting to take exposure to REMFs should check on the fund’s reputation, past returns and investment objective before doing so.


One response

  1. Real Estate Funds serves the most basic purpose which an equity-oriented mutual fund scheme does make the investments relatively risk-free and convenient compared to direct investment in the underlying securities.

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