REIT Mutual Funds in India: Meaning, Benefits & Taxability
Traditionally, for Indians, real estate can be a favoured investment option. REITs typically invest in real estate assets like commercial properties and office spaces. REITs can be a way for small investors to enter the real estate market without a large capital outlay. So, if you’re interested in real estate investment trust mutual funds and believe that this sector will undergo prosperous growth, check out this guide on real estate mutual funds!
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.
Features of REIT Mutual Funds
Let’s have a look at the features of the best REIT mutual funds in India.
- High Liquidity: REIT mutual funds typically offer higher liquidity than direct property investments because they can be bought and sold on the stock market, which is not true for physical properties.
- Portfolio Diversification: The ultimate corpus of REIT mutual funds in 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. However, while diversification within REIT mutual funds can reduce risks, real estate investments are still subject to market risks, economic downturns, and regional challenges.
Who Should Invest in REIT Mutual Funds?
You may find REIT mutual funds interesting if you are:
- 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. However, investors still need to conduct a considerable amount of research and consult a financial advisor before investing.
- 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 as per Union Budget 2024-25
Understanding the latest tax regulations on REIT equity mutual funds is essential for making informed investment decisions. The Union Budget 2024 has introduced significant changes to the taxation of equity mutual funds, simplifying the tax structure while altering rates and benefits. Here is a detailed breakdown of the new tax rules:
Short-Term Capital Gains (STCG)
If you hold equity mutual funds for less than a year, the gains from these investments are classified as short-term capital gains. According to the new budget, these gains are now taxed at a rate of 20%, which has been increased from the previous rate of 15%.
Long-Term Capital Gains (LTCG)
For equity mutual funds held for more than a year, the gains are considered long-term capital gains. The key points to note under the new budget are:
- Tax-Free Limit: Gains up to Rs. 1.25 lakh in a financial year remain tax-free. This limit has been increased from the previous threshold of Rs. 1 lakh.
- Tax Rate: Any gains above Rs. 1.25 lakh are taxed at a flat rate of 12.5%. It was previously taxed at 10%.
- Indexation: It’s important to note that the benefit of indexation, which previously allowed investors to adjust the purchase price of their assets for inflation, has been removed for all asset classes, including equity mutual funds.
Indexation is a method used to adjust the purchase price of an asset (like property or gold) for inflation over the years. This adjusted price is then used to calculate capital gains. Previously, long-term capital gains from selling property, gold, or other unlisted assets were taxed at 20%, but you could use indexation to reduce your taxable profit. The new rule simplifies the tax structure by setting a flat 12.5% tax rate for all long-term capital gains. However, it removes the indexation benefit.
Summary
| Capital Gains Tax | Holding Period | Old Rate | New Rate |
| Short-Term Capital Gains (STCG) | Less than 12 months | 15% | 20% |
| Long-Term Capital Gains (LTCG) | More than 12 months | 10% | 12.50% |
No Indexation Benefit: This change affects the overall tax liability, potentially increasing it for long-term investors.
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 invest in REIT mutual funds through smallcase! Simply, go to smallcase.com or the smallcase app, and login via your phone number. Click on ‘Discover‘ and enter the name of the specific mutual fund name in the search bar and hit enter. You can click on ‘invest now’ and select whether you want to invest a lump sum amount or start a SIP and start investing!
