Investing in Real Estate - Part 2

In my previous blog, I explained the benefits of investing in Real estate even though the returns when compared in isolation is not the highest when compared with other asset classes such as Equity.
In this blog, I will explain the concept of realty mutual funds and the advantages/disadvantages of the same as a means to invest in Real Estate indirectly.

How do they work ?
Realty Mutual funds function almost in the same manner as the typical equity mutual funds work where money is collected from various investors for the sole purpose of investment in real estate over long periods of time. These are typically close ended (cannot be bought and sold on a daily basis) where the period of investment varies between 5 and 7 years if not more. These mutual funds are started by AMCs along with participation from realty developers. The modus operandi is fairly simple and straight forward. The money collected by the fund house (over a period of time) is invested in the various real estate properties that the real estate developer identifies and develops it for future sale to the potential buyers. The funds could invest specifically in retail, commercial, hospitality sectors or any of them. It really depends on the theme of the fund. They could also deploy the money in buying real estate and then generate revenue by renting/leasing them to the final users.

Advantages
1. Helps in achieving the diversification of wealth by investing in the real estate asset
2. Mitigates risk of volatility of real estate prices across the country by investing in real estate across multiple projects in the country and multiple categories of asset such as retail, commercial etc.
3. The funds are handled by professionals who have expertise in understanding the dynamics of the real estate business. Leave it to them to identify the assets to invest.
4. No need to register the property etc thus reducing the hassles in owing an real estate.

Disadvantages
1. Banks do not give loans for participating in the investment of such realty mutual funds
2. Not very liquid (Though there is a published price for every quarter, it is not easy to exit the fund as the seller has to find his own buyer) even thought it is marketed as a Mutual Fund.

Limitations
1. The entry barriers to invest in such funds are fairly high even today. It was close to Rs 1 crore to begin with but has reduced to Rs 20 Lakhs now.

I believe that these funds will become more and more affordable for a common man to participate in the near future. Just like Mutual Fund SIPs where the entry barrier was Rs 500 p.m has now reduced to Rs 5 p.m, I assume that the entry barrier for such products will also come down.