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Real Estate Mutual Fund

A new investment product called Real Estate Mutual Fund is being developed which will make it easier for the average investor to invest his or her hard-earned money in real estate.

A real estate mutual fund (REMF) scheme means a mutual fund which has investment objective to invest directly or indirectly in real estate assets or other permissible assets and should be governed by the provisions and guidelines under the Securities and Exchange Board of India, SEBI (Mutual Funds), Regulations, 1996. These assets are identifiable immovable property within India excluding under construction project, vacant land, deserted property, land for agricultural use and property attached to government. The structure of the REMFs, initially, would be close-ended and the units should be compulsorily listed on the bourses and net asset value (NAV) of the scheme should be declared daily.

A mutual fund is a professionally managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities. The fund manager, also known as portfolio manager, invests and trades the fund\'s underlying securities, realizing capital gains or losses and passing any proceeds to the individual investors. Currently, the worldwide value of all mutual funds totals more than $26 trillion. Before investing in mutual funds you must be aware of some important terms related to it. They are discussed briefly here.

• AMC - An Asset Management Company is the fund house or the company that manages the money. The mutual fund is a trust registered under the Indian Trust Act. It is initiated by a sponsor. A sponsor is a person who acts alone or with a corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund. For instance, ABN AMRO Trustee (India) Private Limited is appointed as the trustee to the ABN AMRO mutual fund. ABN AMRO Asset Management (India) Limited is appointed as its investment manager. Various funds with different objectives can be floated under the umbrella of one parent. So ABN AMRO Equity Fund, ABN AMRO Opportunities Fund and ABN AMRO Flexi Debt Fund are all independent schemes of ABN AMRO Mutual Fund. They are managed by the ABN AMRO AMC.

• NAV - The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced Rs 10. Later, depending on the value of the investments, this price could rise or fall.

• Load - This is a fee that is charged when you buy or sell the units of a fund. When you buy the units of a fund, you pay a percentage of it as a fee. This is known as the entry load. Let\'s say you are investing Rs 10,000 and the entry load is 2%. That means you pay Rs 200 as the entry load and Rs 9,800 is invested in the fund. Now, let\'s assume you are selling the units of your fund. And the Rs 10,000 you invested initially is now Rs 15,000. Let\'s further assume the exit load is 2%. So you pay Rs 300 and get back Rs 14,700. Generally, if funds charge an entry load, they will not charge an exit load or vice versa. Only one of the loads is charged. The load is a percentage of the NAV.

• Portfolio - This is the term given to all the investments made by the fund as well as the amount held in cash.

• Corpus - Let\'s assume a very small mutual fund has an initial investment of 1,000 units and each unit is worth Rs 10. Hence, the total amount with the fund is Rs 10,000. This is referred to as the corpus. Later, some other investors invest Rs 2,000. Now the corpus will be Rs 12,000 (Rs 10,000 + Rs 2,000). The total amount invested (Rs 12,000) is called the corpus or the total amount of money invested in the fund.

• AUM - Assets Under Management is the total value of all the investments currently being managed by the fund. Let\'s say the corpus is Rs 12,000 but, due to a rise in the price of the shares it has invested in, the value of the units has increased. So the Rs 12,000 invested is now worth Rs 15,000. This figure is referred to as AUM.

• Diversified Equity Mutual Fund - This is a mutual fund that invests in stocks of various companies in various sectors.

• ELSS - Equity Linked Saving Schemes are diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act. To avail of the tax benefit, your money must be locked up for at least three years.

• Balanced Fund - A fund that invests in both equity (shares) and debt (fixed return investments) is known as a balanced fund.

• Debt Fund - These are funds that invest in fixed return investments like bonds. A liquid fund is one that invests in money market instruments; these are fixed return investments of a very short tenure.

• NFO - A New Fund Offering is the term given to a new mutual fund scheme.

• SIP - A Systematic Investment Plan refers to periodic investing in a mutual fund. Every month or every three months, the investor will have to commit to putting in a fixed amount. This will go towards the purchase of units. Let's say that every month you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000. If the NAV on the day you invest in the first month is Rs 20, you will get 50 units. The next month, the NAV is Rs 25. You will get 40 units. The following month, the NAV is Rs 18. You will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

SEBI guidelines stipulate that at least 35 percent of the net assets of the REMF shall be invested directly in real estate assets. And the balance may be invested in mortgage-backed securities and securities of companies dealing in real estate development projects and other securities. Taken together, investment in real estate should not be less than 75 percent of the net assets of REMF. But REMFs are barred from investing more than 15 percent of their net assets in the real estate assets of any single real estate project. Also, REMF schemes can't invest more than 15 percent of the net assets in the equity shares or debentures of any unlisted company. Real estate funds will invest in an array of property like office, malls, hotels and apartments, and the rental income so earned will be distributed as dividend. REMFs are required to distribute 90 percent of income by way of yearly dividend. They have to disclose their NAYS on a daily basis thereby, making investments more transparent. Also, since REMF scheme shall be routed through banking channels sans cash or unaccounted transactions, it'll further add to transparency. Leading real estate players like Ajay Piramal Group, HDIL, Ornaxe and Akruti are keen to launch these funds.

REMFs have an obvious advantage over investment in physical property as the entry barrier is very low. Compared to several lakhs of investment in property, one can go in for REMFs with a meager investment of just about Rs 5,000- 10,000. Even the threshold limit of investment in Real Estate Venture Funds have been quite high- Rs. 25 lakhs and above. Investing in physical real estate is getting difficult in view of high prices and increasing interest rates which are set to soar again, resulting in higher unaffordable EMls. Investment in real estate is a very complex transaction that involves lot of knowledge and expertise. It is not so easy to identify profitable location and property for investment purposes. Then there are issues of doubtful titles. Moreover, property transactions involve high stamp duty whereas in REMF, transaction costs involving brokerage and asset management charges are very low. Mutual Funds can be bought and sold easily. The investment in physical property runs the risk of erosion of portfolio value especially in the present turbulent times when property prices are undergoing correction and since REMFs NAVs will be available on daily basis, REMFs have more transparent and upto-date valuations. And this makes exit much easier than in the case of physical property.

While investing in a physical property, investors are left to face the market vagaries. However, in the case of REMFs, there are enough regulatory measures in place to protect their interests. Not only the risk of investors gets minimized due to diversified portfolio in MF, even qualified fund managers ensure that right investment decisions are made to safeguard investors’ interests. As per the SEBI guidelines, REMFs will have two independent valuers. According to A. P. Kurien, Chairman, Association of Mutual Funds of India, these valuers will look at whether MF has invested at correct price to protect investors’ interest. SEBI has also introduced checks to maintain corporate governance standards. Also, there are controls to check that developers do not include their substandard assets into the REMF portfolio that can be detrimental to the interests of the investors.

REMF will not only prove to be real boon for the small investors but also a bonanza for developers reeling under the fund squeeze. Hence in nut shell REMFs will provide a much-needed boost to real estate market with investment. And by curtailing black money and by bridging gap in demand and supply, real estate funds may well have a sobering impact on property prices. In all, it is a high sprit joyful situation for the investors, developers and the real estate sector as a whole.

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