Real Estate Investment Funds

For years, the real estate and housing market has been one of the most preferred investment avenues for investors. However, real estate prices have risen so much that it has become difficult for small investors to purchase property. 

 

Today, these investors can put their money in Real Estate Investment Funds/Trusts (REITs) or Real Estate Mutual Funds . These schemes enable one to earn dividend income by investing in real estate properties like: 

• Apartment complexes

• Infrastructure

• Corporate buildings

Firstly, it’s important to understand the difference between REIT Funds and Real Estate Mutual Funds. Real Estate Investment Trusts (REITs) allow you to invest in properties, including apartment complexes, healthcare buildings, infrastructure, etc.

 

On the other hand, Real Estate Mutual Funds are investment instruments that enable investors to invest in REITs, indices, and real estate stocks.

A company needs to meet some requirements to qualify as a Real Estate Investment Trust (REIT). Here are the specific requirements:

• It must be structured as a corporation or a business trust

• It must extend fully transferable shares

• It must have at least 100 shareholders

• It must invest at least 95% of the REIT’s total income

• It must be managed by the board of directors or a team of trustees

• It must accrue at least 75% of gross income from rent or mortgage interest

• It must pay at least 90% of the taxable income as a dividend

• It must have at least 75% of investment assets in the real estate

• In each taxable year, more than 50% of its shares cannot be held by less than 5 people 

• Its assets must comprise a maximum of 20% of stock under taxable REIT subsidiaries

There are various types of mutual funds, like debt funds, liquid funds, money market mutual funds, etc., which you can invest in. Likewise, Real Estate Investment Trust (REIT) is classified into various types, broadly on the basis of the businesses it is involved in.

 

Here are a few types of REITs:

• Equity REITs

Equity REITs are one of the most well-known options, and they deal in income-generating properties. In simple words, the primary source of generating income is rent. The income earned through Equity REITs gets distributed to all the investors.

• Mortgage REITs

Mortgage REITs lend money to businesses dealing in the real estate industry. As the name suggests, they earn income through EMI or mortgage payments, and not via rent. Mortgage REITs also earn income as interest, and this income gets distributed among its investors.

• Hybrid REITs

Hybrid REITs park your funds in both Equity REITs as well as mortgage-based REITs. These REITs earn regular income via rent and interest. This is a great option through which you can diversify your portfolio and get returns.

• Private REITs

Private REITs cater to a selective list of investors. They are not registered on any stock exchange. Hence, they do not trade on any stock exchanges. They are also not registered with the Securities and Exchange Board of India (SEBI) as well.

• Publicly Traded REITs

Publicly Traded REITs are listed on the National Securities Exchange. They are also regulated by SEBI. You can purchase and sell such shares via NSE.

• Public Non-Traded REITs

Public Non-Traded REITs are registered with SEBI. Even though they are registered with SEBI, they are not traded on NSE. So, Public Non-Traded REITs have lower liquidity than publicly traded ones. However, these options are comparatively more stable due to the lower volatility.

 

The following are the risks associated with investments in REIT mutual funds:

• Interest Rate Risk

One of the main factors that influence the overall returns on your REIT investments is the interest rate. Real Estate Mutual Funds do not offer flexibility to investors to decide how the fund needs to be allocated or which company stocks to be bought.  

• Market Risk

The trends in the real estate market determine the returns that you can make on your investment in REITs. If the demand for properties in the market is high both in terms of rental property and outright purchase, your mutual fund will yield higher returns.

REITs and Real Estate Mutual Funds are the most favourable investment instruments for small investors who have a keen eye for the real estate sector. Due to the rising cost of properties, small investors are usually unable to invest in real estate. 

 

However, they can now invest a portion of their capital in real estate mutual funds to further diversify their investment portfolio.

While investing, it is crucial to pay attention to the taxation rules associated with that investment. When it comes to REITs, different taxation rules apply based on the income and redemption of the investment. 

 

Here are the taxation rules for REITs that you must be aware of:

• Dividends

Dividends that you get from REITs are completely taxable. These dividend payouts get added to your annual income and get taxed based on the income tax slab you fall under.

• Capital Gains

The capital gains that you get when you sell your REIT units are also taxable. They are categorised as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) on the basis of your holding period.

 

If your holding period is 1 year or less, they are categorised as STCG and attract a tax rate of 15%. If the holding period is more than 1 year, they are categorised as LTCG and come with a tax rate of 10%.

• Capital Gains for International REIT Fund of Funds

If you sell units of International REITs Fund of Funds, non-equity capital gains taxation rules apply. The STCG tax applies if the holding period is 3 years or less. 

 

You need to pay it as per the applicable income tax slab. The LTCG tax applies on units held for more than 3 years and attracts a 20% tax rate.

If you are seeking capital appreciation and exposure to the real estate sector, REIT mutual funds may be a preferred option for you. These schemes are also the best instruments if you want to invest in this sector but do not want to own physical property.

 

However, if you are thinking of investing in REIT Mutual Funds, there are a few factors that you need to consider. Most importantly, you must assess the prevailing trends in the real estate market. In addition to this, you also need to consider interest rates, demand and supply of real estate properties, and so on.  

Investing in REIT mutual funds is a great way to build wealth for small investors who are aware of the real estate sector. In addition to this, these funds also offer a higher level of diversity to your investment portfolio.