REIT Mutual Funds in India: Meaning, Benefits & Taxability
Traditionally, for Indians, real estate can be a favoured investment option. Properties like apartment complexes, infrastructure, healthcare buildings, etc., are included in REIT or Real Estate Investment Trust Mutual Funds. Being one of the key second-largest employers in employment generation, REITs can be a fairly easy way even if you don’t have a huge corpus.
So, if you’re interested in real estate investment trust mutual funds and believe that this sector will undergo prosperous growth, check out the best real estate mutual funds now!
What are Real Estate Investment Trust Mutual Funds?
Real Estate Funds are sector funds that invest in securities from real estate sectors. With this, you can typically invest in a diversified portfolio of properties, including residential, commercial, and industrial real estate. Investors benefit from potential appreciation in property values, rental income, and diversification within their investment portfolios. Managed by a fund manager, these market-listed investments enable the exposure of real estate properties by diversifying your portfolio. Therefore, if the sector grows, you will most likely get good returns.
Best Real Estate Mutual Funds
Here we have listed the three best real estate mutual fund investment schemes 2024 that could offer additional opportunities and yield better returns.
| S.No. | Name of the Real Estate Mutual Fund |
|---|---|
| 1. | Kotak International REIT FOF |
| 2. | PGIM India Global Select Real Estate Securities FOF-Regular Plan-Growth |
| 3. | Mahindra Manulife Asia Pacific REITs FOF-Direct Plan-Growth |
Features of REIT Mutual Funds
Let’s have a look at the features of the best REIT mutual funds in India.
- High Liquidity: Investing in REIT mutual funds directly offers low liquidity since selling a property is quite difficult. However, investing in real estate mutual funds India can rule out the problem as investors may liquidate it whenever they want.
- Portfolio Diversification: The ultimate corpus of REIT mutual funds India can be invested in a wide range of properties that can also yield returns on rental income. Thus, portfolio diversification can help investors get an overall exposure to the various sub-sectors simultaneously.
- Flexibility: The best real estate mutual fund schemes may offer enhanced flexibility in this scheme. So, depending on the investment amount and their financial goal, investors can choose which funds they want to invest in.
- Stability: Another characteristic of top-performing REIT mutual funds is their ability to mitigate the risk associated with one’s portfolio. Despite the known volatility of real estate prices, the diversification in these funds minimises their impact.
Who Should Invest in REIT Mutual Funds?
Even the thought of investing in real estate looks expensive, right? But anymore.
With the advent of real estate investment trust mutual funds, one can invest in real estate with a minimum investment amount. Hence, small and large investors can invest in real estate mutual funds India.
However, unlike other investments, you don’t need to monitor these mutual funds closely as experienced professionals like fund managers manage them.
Therefore, any investor can consider investing in REIT mutual funds due to the following reasons:
- Seeking to explore opportunities in the real estate sector.
- Wish to achieve capital appreciation
- Want to diversify your investment portfolio.
- Interested in investing in the real estate sector but may not want a physical ownership.
Benefits of the Best Real Estate Mutual Fund Schemes
Here is a list of benefits of investing in the best REIT mutual funds.
- Minimal Effort: The REIT mutual funds minimise effort, as professional fund managers handle all investment responsibilities. This means investors need not worry about paperwork or legal processes.
- Protection Against Inflation: When the economy is rising, commodities and even real estate prices increase. As a result, the value of real estate fund units also increases. Hence, these can be a great option for protection against inflation.
- Alternative to Buying Property: Acquiring property ownership can be time-consuming and arduous. Thus, interested investors can find value in REIT Mutual Funds, which may serve as an alternative to property ownership. It potentially spares them from the burdens of property maintenance and the risks associated with legal complications.
Potential Risks of Investing in REIT Mutual Funds
Here are two primary risks associated with investing in the best real estate investment trust mutual funds:
- Market Risk: The real estate market can be highly dependent on property demand. Hence, if the market is rising, so does the price of properties, leading to good returns on rental incomes.
- Interest Risk: The interest rate regime can affect the real estate sector.
Taxability of REIT Mutual Funds in India
The taxability of REIT Mutual Funds in India can be divided into two main categories: dividend tax and capital gains tax. Let’s break them down:
Dividend Tax:
- Taxable: Dividends earned from REIT Mutual Funds are fully taxable as per your income tax slab.
- TDS: If the annual dividend income exceeds Rs. 5,000, the fund house will deduct a tax deducted at source (TDS) of 10% at the time of payment.
- Special Tax Concession: Some REITs may choose to avail of a special tax concession under section 115BAA of the Income Tax Act. Under this, the REIT itself pays the tax, and the dividends received by investors become tax-free in their hands. However, be sure to check the specific REIT you’re considering to confirm its tax status.
Capital Gains Tax:
- Short-Term Gains (investments held for less than 1 year): Taxed at 15% as per your income tax slab.
- Long-Term Gains (investments held for more than 1 year): Taxed at 10% after applying the indexation benefit, which adjusts the cost of acquisition for inflation. Indexation reduces the taxable capital gain, resulting in lower tax liability.
REIT vs. Real Estate Mutual Fund
Real estate investment trusts (REITs) and real estate mutual funds provide individual investors with opportunities for diversification and cost-effective access to different real estate market segments. They also offer greater liquidity than direct ownership or investment in real estate properties. However, despite the similarities, let’s look at the list of differences between REITs and Real Estate Mutual Funds.
| Feature | REIT | Real Estate Mutual Fund |
|---|---|---|
| Investment type | Owns and operates real estate directly | Holds a basket of real estate securities (REITs, real estate stocks) |
| Liquidity | Highly liquid, traded on major exchanges | Less liquid, redemption may take days or weeks |
| Management | Managed by internal team specializing in real estate | Managed by professional fund managers |
| Minimum investment | Varies by REIT, typically lower than mutual funds | Varies by fund, can be higher than some REITs |
| Dividends | Required to distribute 90% of taxable income as dividends | Not required to distribute dividends, may reinvest them |
| Fees | Lower management fees than mutual funds | May have higher expense ratios than REITs |
| Diversification | Limited to specific property types or geographic regions | More diversified exposure to different real estate sectors and markets |
| Capital appreciation | Can offer some capital appreciation but primarily focused on income generation | Potential for higher capital appreciation but also higher risk |
| Taxation | Dividends may be taxed as ordinary income | Some funds may distribute capital gains, resulting in higher tax implications |
To Wrap It Up…
In conclusion, incorporating real estate mutual funds into your investment portfolio offers a valuable avenue for diversification, especially for those with limited funds for direct real estate investment. However, investors must evaluate their investment goals, risk tolerance, time horizon, and asset allocation before considering REIT mutual funds or real estate ETFs in India. Conducting a thorough analysis of EPS growth and dividend income from previous years is essential to maximise potential returns.
FAQs
No, real estate mutual funds and REITs aren’t the same. While similar, REIT mutual funds hold shares of REITs and other real estate assets, while REITs own and operate income-generating properties directly. Think of them as a fund invested in REITs, not owning actual real estate like REITs themselves.
REIT ETFs are exchange traded funds primarily investing in equity REIT securities and other related derivatives.
Yes, the real estate investment trust mutual funds can pay dividends, but not all do. Unlike REITs, which must distribute 90% of their taxable income as dividends, REIT mutual funds are not subject to the same mandatory payout requirement.
You can surely invest in the best real estate mutual funds India by opening a Demat account. Thus, you can buy REIT units from the stock exchange where it is being traded.
