Realty mutual funds only long-term play

With the SEBI issuing guidelines on real estate mutual funds (REMFs), investors will have another instrument to park their funds.

However, financial experts are of the view that though REMFs are good for those who want to participate in the property boom, investors should not look at them as equity funds.

"Indian investors have in the past, entered products thinking they will reap rich rewards in the short term. As a result, they have suffered quite badly," said an investment advisor.

REMFs will operate in this manner. They will be closed-ended in nature. But by listing on the exchanges, the funds would give the investors an option to exit. The funds will invest in real estate and related assets as per Sebi's norms. Investors will get units in return.

The units will be listed on the stock exchanges and net asset values (NAVs) will be declared on a daily basis to give the investors an indication about fund performance.

Since the real estate funds are closed-ended, they will list at a discount. "The closed-ended funds always list at a discount. However, they rise as the maturity approaches," said Hemant Rustagi, director, Wiseinvest Advisors.

This implies that players accustomed to investing in equities and booking profits when the market goes up may not be the right customers for such products. In fact, it would be a good idea to buy these funds after listing as they will be available at lower rates.

The funds are mandated to hold a minimum 35 per cent of their corpus in real estate assets. The remaining could be invested in mortgage-backed securities, real estate company stocks and shares of other companies listed on stock exchanged. Jai Mavani, who heads real estate at KPMG, said, "About 15 per cent can be invested in unlisted companies."

As Mavani puts it, to show regular returns, the bigger chunk of the REMF's portfolio will be investing in regular income-yielding assets. This means mutual funds will buy properties such as office spaces, malls, hotels and hospitals and earn rental income.

The investors will have to use REMFs only as portfolio diversifiers and not as core investments. Nipun Mehta, CEO, Unitis Towers Wealth Advisors said that the investor needs to decide on the exposure to real estate. Moreover, the allocation should be made after considering the real estate owned in physical form by a person. One should invest in REMFs accordingly.

"The allocation to REMFs can be maintained at merely 5-15 per cent of the portfolio," said Mehta.

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