Real Estate Mutual Funds

November 16, 2023

Real Estate Mutual Funds

Real Estate Mutual Funds pool investors’ capital to strategically invest in a curated selection of real estate assets. They enable participants to partake in the sector’s financial returns through a professionally managed portfolio, avoiding the complexities of direct property management and ownership. 


What are Real Estate Funds?

Real Estate Funds (REFs) are specialized mutual funds that primarily invest in securities offered by public real estate companies. These funds aim to expose investors to the real estate sector, which can provide diversification benefits to an investment portfolio. REFs usually invest in real estate investment trusts (REITs), real estate operating companies, or direct ownership of properties.

Let’s consider the case of XYZ Real Estate Fund. This fund primarily invests in a diversified portfolio of REITs that own and manage various commercial and residential properties across India. By investing in the XYZ Real Estate Fund, investors get a chance to benefit from the potential growth and income generated from real estate investments without the need to manage the properties directly. 

Features of Real Estate Mutual Funds

The defining feature of Real Estate Mutual Funds is their specialized focus on the real estate sector, offering investors a distinct avenue to engage with property markets through a focused portfolio.

Here are some of their key features:

  • Diversification: One of the primary features of REMFs is the diversification they offer. By investing in a variety of real estate assets, they help spread out the investment risk.
  • Professional Management: These funds are managed by professional fund managers with in-depth knowledge and experience in the real estate market.
  • Liquidity: Compared to direct real estate investments, REMFs provide better liquidity as they can be bought and sold like other mutual funds.
  • Income Generation: REMFs have the potential to generate income through rental yields and capital appreciation.
  • Transparency: They offer transparency in terms of holdings, valuations, and transactions, which is beneficial for investors.
  • Tax Efficiency: REMFs can provide certain tax advantages compared to direct real estate investments, depending on the jurisdiction and the structure of the fund.

Advantages of Real Estate Mutual Funds

The main importance of investing in Real Estate Mutual Funds (REMFs) lies in the attractive returns they can offer through the real estate sector’s growth. 

Here’s a closer look at the advantages:

  • Diversification: Provides diversification by investing in different types of real estate assets which can mitigate risk.
  • Professional Management: Expert fund managers handle the investment decisions, aiming for higher returns.
  • Liquidity: Easier to buy and sell compared to physical real estate.
  • Income Generation: Potential for income through rental yields and capital appreciation.
  • Transparency: Regular disclosures provide a clear picture of fund performance and holdings.
  • Tax Efficiency: Might offer better tax treatment than direct real estate investments, enhancing net returns.

Who Should Invest in Real Estate Funds?

Investors seeking exposure to the real estate sector without the hassle of managing physical properties might find REFs appealing. They offer a less hands-on investment approach while providing a share in real estate profits. 

Furthermore, with professional management, these funds can optimize returns through strategic asset allocation and management. Real Estate Funds also offer liquidity, unlike physical real estate, making it easier for investors to enter or exit their positions. 

By diversifying into REFs, investors can achieve a balanced portfolio, spreading their risks and potential rewards across different asset classes. Real Estate Funds (REFs) are suited for a variety of investors. 

Here are some considerations:

  • Risk Tolerance: Ideal for those with a moderate risk tolerance as real estate can be less volatile than stocks.
  • Investment Horizon: Suitable for long-term investors due to the potential for asset appreciation over time.
  • Diversification: Those looking to diversify their portfolio beyond traditional asset classes.
  • Income Generation: Investors seeking regular income from rental yields.
  • Tax Benefits: Individuals looking to avail possible tax benefits associated with real estate investments.
  • Inflation Hedge: Real estate often acts as a hedge against inflation, protecting purchasing power.

Taxability Of Real Estate Mutual Funds

Short Term Capital Gains (STCG) tax applies to units held for less than 36 months at a rate of 15%. For units held longer, Long Term Capital Gains (LTCG) tax is levied at 10% on gains exceeding Rs. 1 lakh. 

  • STCG Tax Rate: 15% for investments held under 36 months.
  • LTCG Tax Rate: 10% on gains over Rs. 1 lakh for long-term investments.

Best Real Estate Mutual Funds

Here are some funds that stand out due to their consistent performance in the market.

Best Real Estate Fund 1 Year Return3 Year Return
ICICI Prudential BHARAT 22 FOF Direct Growth15.81%22.60%
Franklin India Dynamic Asset Allocation Fund of Funds Direct Growth14.52%19.35%
PGIM India Global Select Real Estate Securities FOF- Regular Plan- Growth12.34%15.42%
Kotak International REIT FOF13.21%17.53%
Mahindra Manulife Asia Pacific REITs FOF- Direct Plan- Growth11.87%16.23%

What are Real Estate Funds – Quick Summary

  • Real Estate Mutual Funds (REMFs) are investment vehicles that pool money to invest in real estate assets or real estate-related securities.
  • These funds blend features like diversification, professional management, and liquidity.
  • A variety of funds are available, each with its unique focus and performance record.
  • Evaluation of fund performance, investment objectives, and risk tolerance is essential for potential investors in making informed decisions.
  • Start your investment journey for free with Alice Blue. Alice Blue offers investing in equity, mutual funds, and IPO completely free of cost.

Real Estate Mutual Funds – FAQs  

What are Real Estate Funds?

Real Estate Funds (REFs) are investment pools that primarily focus on investing in real estate assets or real estate-related securities, providing a way for investors to gain exposure to the real estate market without directly owning properties.

Which is the best real estate mutual fund?

Fund Name1 Year Return3 Year Return
ICICI Prudential BHARAT 22 FOF Direct Growth15.81%22.60%
Franklin India Dynamic Asset Allocation Fund of Funds Direct Growth14.52%19.35%
PGIM India Global Select Real Estate Securities FOF- Regular Plan- Growth12.34%15.42%

Are real estate mutual funds a good investment?

Real estate mutual funds can be a good investment avenue for those looking for real estate exposure with the added advantages of professional management, diversification, and liquidity.

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