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A flavour of real estate, without the risks

Neighborhood, Outdoors, Nature

A flavour of real estate, without the risks

A flavour of real estate, without the risks

Despite the cyclical ups and downs in the Indian economy, the country’s real estate sector has remained resilient. Residential and commercial properties could see an uptick, which means this could be the ideal period to make real estate investments. However, not everyone has the risk appetite to invest in this sector directly. And that is where a buffer mutual fund could be the right fit.

Real estate mutual funds invest into the realty sector without exposing the investors to its volatilities. It also cuts out the complications of physical property ownership. Individual investors may find it risky to infuse capital into real estate because if the project suffers losses, they would be directly hit. Hence, indirect investment through real estate MFs could be an alternative.

Through real estate investment trusts or REITs, the real estate mutual funds offer a slice of commercial and residential property investments for retail investors at affordable rates. Over and above REITs, the real estate MFs also invest in equities that have exposure to the realty sector.

Why real estate MFs?

Buying real estate could cost anywhere from a few lakh rupees to several crores of rupees, depending on the location. Even after making the investment, there may be risks of project delays or financial constraints faced by the builder. Real estate MFs could offer a buffer against such challenges.

This means that you could benefit from the boom in the property market without large capital being locked-in. The funds generated from your investment are deployed as capital into real estate projects. There are three primary advantages of real estate MFs:

  1. Flexibility: Funds can be deposited and withdrawn as per your financial situation. There is no lock-in period in such schemes, whereas it could be difficult to buy and sell physical property repeatedly.
  1. Diversification: Without the need to invest high sums of money in properties, you could get a taste of the real estate market through these MF schemes. That means you could have a diverse wealth kitty without the risks.
  1. Inflation hedge: When prices rise for essential commodities, real estate MFs could act as a buffer against inflation. During periods of high inflation, real estate prices are likely to rise. And those invested in real estate MFs could benefit during such phases.

To know more about mutual funds, visit SC Invest

How do real estate MFs work?

The mutual fund houses invest in multiple projects, so even if one project were to be loss-making, the other projects can help recoup the investments. This investment could be more liquid than buying a physical property because you can redeem it as per your requirements.

To minimise risks, the MFs could invest in residential properties, hospitality projects, office spaces, and even entertainment-focused real estate. This could be ideal for investors whose goal is long-term wealth accumulation.

Similar to other debt mutual fund products, real estate MFs attract capital gains tax. If you redeem within three years, there will be short-term capital gains as per your tax bracket. Redemption after three years attracts long-term capital gains of 20% after adjusting for inflation.

However, it could be beneficial to keep track of the interest rate movements, since rate hikes and cuts impact real estate prices. If interest rates are hiked, interest rates payable for loans go up. This makes property rentals and purchases expensive and may affect the overall real estate demand. Standard Chartered’s market insightss could offer insights at the click of a button.

Who is it suitable for?

Real estate mutual funds could be ideal if you wish to buy properties for investment purposes. The fund manager is responsible for doing the due diligence for the real estate investments. Based on their prior experience in the market, these experts look at various property choices and historic returns before making a decision.

Investors in their 30s and 40s, who want to accumulate wealth for the family, could consider real estate mutual funds. You could opt for schemes after studying their returns data for the past two to five years. These schemes could be especially suitable if you have an investment horizon of between 10-20 years. The longer the tenure, the better the returns.

However, one aspect to consider is the possibility of deflation. This is an extended period of low economic activity that causes the prices of commodities across sectors to crash. Over-reliance on any single investment, including real estate mutual funds, could lead to losses. Hence, it would be useful to have property-linked MFs as one of the investment options among the other asset classes.

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This article is for information and educational purposes only. It is meant only for use as a reference tool. It has not been prepared for any particular person or class of persons. The products and services mentioned here may not be suitable for everyone and should not be used as a basis for making investment decisions. This article does not constitute investment advice nor is it an offer, solicitation or invitation to transact in any investment or insurance product. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment. Prior to transacting, you should obtain independent financial advice. In the event that you choose not to seek independent professional advice, you should consider whether the product is suitable for you. You should refer to the relevant offering documents for detailed information.

Standard Chartered Bank is a distributor of mutual funds and referrer of other third party investment products and does not provide any investment advisory services as defined under the SEBI (Investment Advisers) Regulations, 2013 or otherwise. Investments are subject to market risk. Read scheme related documents carefully prior to investing. Past performance is not indicative of future returns.