Funds from house

REMF Basics Mandate: At least 35% of corpus invested in built-up real estate Can also invest in realty stocks, mortgages Type: Closed-ended funds NAV: To be declared daily, assets valued every 90 days Taxation: Short-term gains taxed at normal rates; long-term gains at 10%

A flat in a posh Mumbai location fetching Rs 27 crore. Deluxe penthouses priced upwards of Rs 5 crore selling like hot cakes in Chennai. At these stratospheric levels only the super-rich can think of investing in real estate. Not any more though. With as little as Rs 10,000, you can get a slice of the real estate pie. Last month, Securities and Exchange Board of India announced the final guidelines for real estate mutual funds (REMFs), paving the way for the launch of such schemes.

Real estate is a low-risk asset and helps diversify a portfolio. But it is very illiquid. Buying or selling a property can take up to 2-3 months. Besides, the entry and exit “load” in the form of stamp duties, transfer charges and legal fees are very high. REMFs leapfrog over these hurdles—investors can buy and sell when they want, subject to rules. REMFs look even more attractive when you look at the tax angle.

It’s not been announced, but experts believe REMFs will get the same treatment as gold funds. If the investment is for more than a year, profits would be treated as longterm capital gains and taxed at a flat rate of 10%. On the other hand, as in the case of physical gold, property has to be held for at least three years before it is eligible for longterm capital gains. There too, the tax rate is 20% though the investor gets indexation benefit.

Investors also get the basic benefit of a mutual fund—spreading of risk. “Returns from investments in REMFs may not be as high as from direct investments in property. However, the idea is to reduce the risks,” says Anurag Mathur, joint MD, India, Cushman & Wakefield. Investors should not, however, equate property with equities. Don’t expect the net asset value (NAV) to move like stock prices.

Besides, REMFs may not churn their portfolio as frequently as equity funds do. “REMFs would not be able to outperform equity mutual funds, as they are a different investment class altogether,” says Jai Mavani, who heads the real estate division of KPMG. Since all REMFs would be closedended, they are likely to list at a discount and rise as the maturity nears. However, financial planners suggest that REMFs should only be used to diversify the portfolio and not as core investments. So, don’t allocate more than 5% to 15% of your asset to this option. Also, take into account your existing real estate assets before buying an REMF.