Equity is the best investment option as far as the returns go. However, it is also high on risk and could drown those caught when the tide turns. This is why it is important to diversify across various investment options.
A less risky proposition is real estate, which also offers good returns.
However, the considerations involved in real estate could be huge and not within everybody’s means.
Real estate schemes launched by portfolio managers (real estate PMS), real estate investment trusts (REITs) and real estate mutual funds (REMFs) can be considered instead.
The guidelines for REMFs were announced recently, though no fund house has come up with a scheme yet. A few portfolio management service (PMS) providers, meanwhile, are offering real estate PMS schemes.
While a real estate PMS would typically need a minimum commitment of Rs 25 lakh and is for the affluent, REMFs are aimed at enabling retail participation.
Norms for REITs are still awaited.
REMFs are expected to be closed-ended and will be listed on the exchange. The taxation issue remains undecided for these funds, which would invest in real estate assets, mortgage backed securities and other real estate related instruments.
Real estate funds have several advantages over direct investments in property.
First, the research and transaction costs made by these entities are far lower than what an individual property buyer makes.
One can expect fund management charges to be around 3% due to higher transaction costs involved in real estate. However, this is far lower than the transaction costs incurred by retail customers (broker charges, costs of searching the property, discount for illiquidity, etc) while purchasing a piece of property directly.
Also, renting out a house proves to be a daunting task with problems ranging from locating and negotiating with customers, bearing maintenance costs when the property lies vacant and paying brokerage charges when the deal is set up through a broker.
Since, real estate PMS or REMFs accumulate a significant corpus, they are better at negotiating terms and often partner with developers at the construction stage itself and even take seats on the developer’s board.
A thorough research on the developer’s background and experience in construction projects is done before they decide to partner with him. This gives them a much better control over the project.
On the other hand, individual investors often land up with bad developers who do not complete construction in time or hand over badly constructed properties.
Diversification is the key even here with real estate PMS/ REMFs spreading the corpus across several projects across cities, types (residential/ shopping/ commercial) and developers.
An average retail investor would find it difficult to manage liquidity – the house as a whole would need to be sold if he needed the money. Finding a buyer often takes time and significant expenses. These issues are taken care of by these investment vehicles.
Unlike REITs and Real Estate PMS, the REMFs may not be allowed to invest in housing projects and investments may be restricted to only commercial projects.
Also worries about real estate prices cooling in the bigger cities remain.
However, with developers finding it difficult to raise fresh capital at this point, investing now could prove beneficial as REMFs would be able to get better bargains in this space.
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