The ‘real’ challenge
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Real estate funds could well be the future asset for investors, says SRIKALA BHASHYAM
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Right choice: Housing is still a good investment
In the last couple of years, there has been much talk about real estate funds, thanks to the sustained property boom in the Indian market. Today, nearly a dozen funds are in the market place with sizes ranging from Rs. 500 crore to Rs. 1,000 crore. More action is likely to be seen in the coming years with the demand-supply gap being still huge in India.
Since the concept is still in its early stages, here is a brief about how a realty fund works. Just like mutual funds, realty funds too mobilise funds from retail and institutional investors and invest the same in residential, commercial projects. Like equity funds, these funds too carry an element of risk and hence returns are not guaranteed.
The difference
The big difference between equity fund and realty fund is that the average investment size is much higher in the case of the latter. For instance, some of the funds had pegged the minimum size at Rs. 5 crore two years ago but the same has come down to as low as Rs. 40 lakh with ICICI Prudential’s recent product. That is the minimum sum one needs to set aside for a property investment these days.
The question is why should one look at a realty fund when he can directly make his investment?
While direct property investment can be more rewarding, a realty fund brings in an element of comfort as the investor need not worry about its management. Again here, the comparison between equity fund and realty fund becomes necessary.
Even in the past, many investors kept away from equity funds as they believed that they had the knowledge to deal with equity market on their own. With the maturity of markets, the stock picking has got a lot tougher in the Indian equity market and so is going to be the case in the property market too.
Disadvantages
However, realty funds have their share of unattractiveness. Most funds have a lock-in period and also carry entry costs. There is no benchmark on the returns earned. Industry sources, however, say that some of these funds have already managed to double their clients’ money in the last 2-3 years. In the long run, however, these funds can be expected to provide returns in the range of 25-30 per cent.
On the other hand, the big advantage with real estate funds is that they allow investors to take exposure to commercial buildings and even help in geographical diversification. For instance, most of the recent funds are focusing on investing in tier II and tier III cities and some, like the Pantaloon group, have created funds with a specific focus on investing in malls. Such investment strategies may not be sustainable for all retail investors in their individual capacity.
At present, most real estate funds are focusing on high networth individuals because of their high ticket size. Going forward, this could come down as more institutions are likely to enter the fray. From the investors’ point of view, realty fund could well become an integral part of their portfolio.
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