Real Estate Mutual Funds spared of paying any income tax

The Economic Times news paper today reported that the uncertainty over the tax-treatment of real estate mutual funds is set to end soon. The government will exempt from tax the income generated by mutual funds which float schemes which aim to invest mainly in the stocks of realty firms.

According to a senior revenue department official, real estate MFs and other MFs that invest in shares of realty companies will be spared of paying tax on all income. The dividend income of unit holders who buy these products to reap the gains of a realty boom will also be tax-free.

Securities market regulator Sebi had approved the launch of real estate mutual funds almost two years ago. But the operational guidelines or norms are yet to be unveiled. Now, with greater clarity on valuation norms and the calculation of net asset value (NAV), the regulator may soon prepare the ground for the launch of real estate MFs, an official said.

Real estate MFs are expected to be close-ended, and the units of these funds will be listed on the exchanges. Such funds invest in both listed and unlisted securities of realty firms. They offer an opportunity to investors to take an exposure to a sector which offers reasonably attractive capital gains and steady dividend income.

However, the Reserve Bank of India (RBI) has not been comfortable with more investment flowing into realty given the dangers of an asset price bubble.

While real estate mutual funds will stand to gain due to favourable tax treatment, Real Estate Investment Trusts (REITs) that directly buy and sell property including apartments and shopping malls could be denied such benefits.

REITs are investment vehicles registered under the Indian Trusts Act. They are managed by professional real estate investment management companies and invest in properties. They also own and manage properties. An investor can buy units in an REIT just as he does in a mutual fund and earn a dividend income on the unit or shares of an REIT.

Ahead of this year’s budget, the capital market regulator had told the government to consider granting tax benefits to REITs on the lines of local mutual funds to encourage wider investor participation. But the revenue department, it appears, has turned down the proposal. Read More about REIT at Investing in Real Estate Part 2

The income-tax law now provides for a pass-through status for mf’s and all income earned by the fund is tax free. But any income distributed by the mutual fund attracts a dividend distribution tax, depending on the nature of the fund. The maximum rate of dividend distribution tax is 25%. But unit holders do not have to pay any tax on their dividend income.

SEBI to clear launch of Real Estate Investment Products

Yesterday, the SEBI Chairman, Mr M. Damodaran has mentioened that the decks have been cleared for the launch of the real estate investment products in the market.

The last hurdle had been cleared with the Association of Mutual Fund Industry and the Institute of Chartered Accountants of India having firmed up the valuation norms for these products.

Explaining the process, he said that these two bodies looked at whether it was possible at all to accord a valuation and the frequency with which one needed to do it. Valuation, almost on a continuing basis, is needed as people enter and exit schemes on a regular basis.

The above means that Real estate fund that were privy only to the High networth individuals will start being available to the common man. Also, the high frequency of price disclosure means that one will be able to get in and get out of the fund just like any other Mutual Fund unlike the current Real estate fund which have long term commitment and lock in.


Learn more about Real estate funds in the links given below

1. Investing in Real Estate Part - I

2. Investing Real Estate Part - II

ING Global Real Estate Fund

ING Mutual Fund has launched a new fund called ING Global Real Estate Fund. The primary investment objective of the Scheme is to seek capital appreciation by investing predominantly in ING Global Real Estate Securities Fund. The Scheme may, at the discretion of the Investment Manager, also invest in the units of other similar overseas mutual fund schemes, which may constitute a significant part of its corpus. The Scheme may also invest a certain portion of its corpus in money market securities, in order to meet liquidity requirements from time to time.

This is not the same as the real estate mutual funds that i covered in my blog sometime earlier.

Please read the following blogs to get details about what Real Estate Mutual Fund is and its advantages

1. Investing in Real Estate Part - I

2. Investing in Real Estate Part - I


Scheme Details
Issue Opens: November 20, 2007
Issue Closes: December 14, 2007
Options : Dividend, Growth and Bonus
Fund Category: Closed-end, Equity Scheme
Minimum Investment: Rs 5000 and Rs 1000 for additional purchases
Load: Load structure for applications received during NFO and on-going sales:

For application below Rs.1 Crore
Entry Load : 2.5%
CDSC : 1% if redeemed within 180 days from the date of investments (date of allotment if invested during the NFO)

For applications of Rs.1 crore and above but less than Rs. 5 crore
Entry Load : Nil
CDSC : 0.5% if redeemed within 180 days from the date of investments (date of allotment if invested during the NFO)

For applications of Rs.5 crores and above
Entry Load : Nil
CDSC : Nil
Exit Load: Redemptions made on Maturity do not attract any exit load. However, redemptions made during the repurchase facility period will attract, for the present, an exit load of 3% of the amount sought to be redeemed under the Scheme

Some more 'Interest'ing news

Here is an extract from various sources on interest related news this morning. Read these news in relation to my previously submitted blog dated 29th June Inflation at 4.28%, Hits 14-month low

1. An 'Interest'ing climb down ahead - Indications are that interest rates will climb down

2. Inflation expected to rise to 4.32% - Will the actual interest rates climb down if inflation does not come down

3. Corporation Bank cuts interest rate on home loans - It does not matter, the bank has decided to cut the interest rate on home loans

4. China's GDP zooms at 11.5% - Will the chinese authority increase the interest rate and cause a flutter in the market.

There is defintely an expectataion in the fall of interest rates possibly leading to the following

1. Depreciation of the rupee
2. Increase in Bond values and hence increase in NAV of Bond Funds
3. Some interest back to real estate sector - See related news at Kotak Realty raises $400 million in 6 months

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.