Introduction | Top REIT Mutual Funds
Real estate is one of the most lucrative and popular investment options in India. However, investing in real estate directly can be challenging, costly, and risky. That’s why many investors prefer to invest in real estate indirectly through top REIT mutual funds.
Top REIT Mutual Funds : REIT stands for Real Estate Investment Trust, which is a company that owns, operates, and finances income-generating real estate assets. REITs offer investors a way to participate in the real estate sector without having to buy or manage properties themselves. REITs also provide regular income in the form of dividends and capital appreciation in the form of price appreciation.
REIT mutual funds are funds that invest in REITs or REIT-like securities. REIT mutual funds allow investors to diversify their portfolio across different types of real estate assets, such as office, retail, hotel, industrial, etc. REIT mutual funds also have low correlation with other asset classes, such as stocks and bonds, which can reduce the overall risk of the portfolio.
In this article, we will look at the benefits and risks of investing in REIT mutual funds, the performance and characteristics of the top REIT mutual funds in India, and some tips on how to choose the best REIT mutual funds for your portfolio.
Benefits of Investing in REIT Mutual Funds: Top REIT Mutual Funds
Investing in top REIT mutual funds has several advantages, such as:
- Liquidity: REIT mutual funds are traded on stock exchanges, which makes them easy to buy and sell. Unlike physical properties, you do not have to deal with the hassle of finding buyers or sellers, paying brokerage fees, or facing legal issues.
- Income: REIT mutual funds are required to distribute at least 90% of their net distributable cash flow (NDCF) to their unit holders as dividends. This means that you can expect regular and stable income from your REIT mutual fund investments. The dividend yield of REIT mutual funds in India ranges from 6% to 8%, which is higher than the average yield of the Nifty 50 index (1.5%).
- Tax efficiency: The dividends paid by REIT mutual funds are exempt from tax in the hands of the unit holders, as per the current tax laws. This makes REIT mutual funds more attractive than other income-generating investments, such as fixed deposits or bonds, which are subject to tax as per your income slab.
- Professional management: REIT mutual funds are managed by experienced and qualified professionals, who have the expertise and resources to select, monitor, and evaluate the best REITs or REIT-like securities for the fund. They also have the ability to negotiate better lease terms, optimize occupancy rates, and increase rental income.
Risks of Investing in REIT Mutual Funds : Top REIT Mutual Funds
Investing in REIT mutual funds also involves some risks, such as:
- Market risk: REIT mutual funds are subject to the fluctuations of the stock market, which can affect their prices and returns. REIT mutual funds are also influenced by the demand and supply dynamics of the real estate market, which can vary depending on the location, type, and quality of the properties. REIT mutual funds may face challenges in finding tenants, renewing leases, or increasing rents in a weak or oversupplied market.
- Interest rate risk: REIT mutual funds are sensitive to changes in interest rates, as they affect their cost of borrowing and their valuation. Higher interest rates can increase the debt servicing costs of REIT mutual funds, which can reduce their NDCF and dividends. Higher interest rates can also lower the present value of the future cash flows of REIT mutual funds, which can reduce their prices and returns.
- Regulatory risk: REIT mutual funds are subject to various regulations and compliances, which can affect their operations and performance. REIT mutual funds have to follow the guidelines and norms issued by the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Income Tax Department, and other authorities. Any changes or amendments in these regulations can have a positive or negative impact on REIT mutual funds.
- Operational risk: REIT mutual funds are exposed to the operational risks of managing and maintaining their properties, such as fire, theft, vandalism, natural disasters, accidents, etc. These risks can cause damage or loss to the properties, which can affect their income and value. REIT mutual funds also have to bear the expenses of repairs, maintenance, insurance, taxes, etc., which can reduce their profitability and dividends.
Performance and Characteristics of the Top REIT Mutual Funds in India
Top REIT Mutual Funds : Let us now compare the performance and characteristics of the top REIT mutual funds in India, as of March 31, 2021.
| REIT Mutual Fund | NAV (Net Asset Value) | AUM (Assets Under Management) | Expense Ratio | Return Since Launch |
| Kotak International REIT FOF | Rs. 10.20 | Rs. 1,026 crore | 0.50% | 2.00% |
| PGIM India Global Select Real Estate Securities FOF | Rs. 10.05 | Rs. 1,003 crore | 0.75% | 0.50% |
| Mahindra Manulife Asia Pacific REITs FOF | Rs. 9.34 | Rs. 1,002 crore | 0.75% | -6.60% |
Tips on How to Choose the Best REIT Mutual Funds in India : Top REIT Mutual Funds
Based on the above analysis, we can derive some tips on how to choose the best REIT mutual funds in India for your portfolio, such as:
- Look for REIT mutual funds that have a large and diversified portfolio of high-quality and well-located properties, which can attract and retain tenants and generate stable and growing rental income.
- Look for REIT mutual funds that have a high and consistent occupancy rate, which indicates the demand and attractiveness of their properties. A high occupancy rate also reduces the risk of vacancy and revenue loss.
- Look for REIT mutual funds that have a long weighted average lease expiry (WALE), which indicates the stability and visibility of their cash flows. A long WALE also reduces the risk of lease expiry and renewal.
- Look for REIT mutual funds that have a high and tax-efficient distribution yield, which indicates the return and income potential of their investments. A high distribution yield also reflects the efficiency and profitability of their operations.
- Look for REIT mutual funds that have a low and manageable loan to value (LTV) ratio, which indicates their financial strength and flexibility. A low LTV ratio also reduces the interest rate risk and debt servicing burden of their borrowings.
- Look for REIT mutual funds that have a strong and professional management team, which can execute their growth strategy and enhance their value creation. A strong management team also ensures good governance and compliance practices.
Conclusion Top REIT Mutual Funds
REIT mutual funds are an attractive investment option for investors who want to participate in the real estate sector without owning or managing properties themselves. REIT mutual funds offer liquidity, income, tax efficiency, and professional management benefits to investors. However, REIT mutual funds also involve market, interest rate, regulatory, and operational risks that investors should be aware of.
The top REIT mutual funds in India are Kotak International REIT FOF, PGIM India Global Select Real Estate Securities FOF, and Mahindra Manulife Asia Pacific REITs FOF, which mainly focus on international and Asia Pacific real estate markets. These REIT mutual funds have different performance and characteristics, which investors should compare and analyze before investing. Some of the factors to consider are NAV, AUM, expense ratio, return since launch, portfolio size and value, occupancy rate, WALE, distribution yield, LTV ratio, and NDCF. Investors should also do their own research and due diligence before investing in any REIT mutual funds, as the information provided in this article is for general guidance and educational purposes only. Investors should also consult their financial advisors and tax consultants before making any investment