Best REIT mutual funds for Investors in India
What is REIT?
REIT or Real Estate Investment Trust is a corporation or association that owns and operates a portfolio of rent-generating high-end real estate properties, similar to mutual funds that carry a portfolio of stocks.
REIT provides dual-income benefits to investors. With REIT, investors receive periodic dividends or interest payouts from rental earnings that act as regular incomes. As per the rules, 90% of the net rental income should be offered to investors as dividends or interest by REITs. And the sale of REIT units on stock markets acts as capital gains for investors.
To generate returns for investors, a minimum of 80 percent of the portfolio of a REIT gets invested in completed and rent-generating properties. The remaining 20% gets allocated to investments in under-construction properties, mortgage securities, government securities, money market instruments, etc.
Best REITs to invest in India in 2022
The following table exhibits some of the best REITs.
Direct plan - Growth option
|Kotak International REIT FOF||180.3 Cr|
|Mahindra Manulife Asia Pacific REITs FOF||37.72 Cr|
Who should invest in REIT?
Investors looking to diversify their portfolio beyond equities and bonds can consider investing in REITs to get exposure to real estate. Also, investors who want to ensure a regular income source for themselves can invest in a real estate investment trust. With a minimum investment amount, they can reap the benefits of this long-term investment and earn a consistent income through periodic dividends or interest payouts.
Taxation of gains from REIT investment
Since investors receive different forms of income from REITs, such as dividends and capital gains, different taxation rules get applied to these incomes. The tax rules that are applied to these incomes are as follows:
- Taxation of dividends: As per tax rules, the dividends payouts from REITs are taxable to the investor. These payouts are first included in the investor's annual income and taxed according to their slab rate for the applicable financial year.
- Taxation of capital gains: Tax on capital gains from REITs differs with the investment duration. An investor may generate Short-term capital gains (STCG) and Long-term capital gains (LTCG) based on their holding period of REIT units.
If the REIT units are held for less than one year, the gains from the holdings will be considered STCG and taxed at 15%. If the holding period is more than a year, the gains generated from units are called LTCG. The long-term capital gains of over Rs 1 lakh are taxed at 10% without indexation benefit, whereas below 1 lakh are tax-free. Suppose your equity gains are 1.3 lakh in a financial year, so the 10% tax is applied only on Rs 20,000 while the remaining 1 lakh will be tax-free.
The risk associated with public REITs
- Liquidity risk: Market participants in India for REIT investment are currently less, especially retail investors. So selling REIT investments at profitable margins can be difficult, particularly in case of emergency and thus resulting in liquidity risk.
- Market risk: Since REITs are traded in stock markets, their prices get affected by market fluctuations. There are many reasons for the market fluctuations, such as recession, changes in interest rates, natural disasters, etc. Sadly, portfolio diversification does help much in such conditions, and investors may have to sell their units at a lower price than they originally paid.
Risks with non-traded REITs
Non-traded REITs are riskier than public REITs as there are no public means to gather information to research or determine values. Besides, they are illiquid, so investors may have to wait for a certain period to access their money. Moreover, there is assurance that this investment will offer a dividend distribution. Even if they do, the dividend will get derived from the sources such as borrowings, sale of assets, or even other investors’ money, which decreases an investor’s interest rate. Non-traded REITs also attract significant expenses such as manager’s fees and commissions that decline the value of an investor’s investment, thus reducing the returns.
Returns from REIT
As an investment should be, REIT provides dual-income benefits to investors. With REIT, investors receive periodic dividends or interest payouts that act as regular incomes, and the sale of REIT units on stock markets acts as capital gains for investors.
Here's how REITs generate these incomes for investors.
- Dividend and interest payouts: Dividends and interest paid out by REITs come from their net rental income. REITs generate income through renting or leasing commercial real estate. The net rental income of a REIT is the income that is retained from the gross income after excluding management fees, detection, maintenance charges, etc. According to the current SEBI rules, 90% of this net rental income gets paid out to investors as dividends or interest.
- Capital Gains: REITs are listed and traded on stock exchanges like stocks. Here the price of individual units changes as per their performance and market demand. So when REIT performs well, the unit price increases and is sold at profitable margins, thus generating capital gains for the investors.
Advantages of investing in REIT
REIT investments offer a plethora of advantages to investors.
- Portfolio diversification: REIT helps you diversify your portfolio in Real estate beyond usual asset classes such as equity, debt, or gold as part of an asset allocation strategy. In this way, you get exposure to real estate without going through the hassles of buying and managing a commercial property.
- Minimum investment amount required: One of the major setbacks with real estate investment is you need to invest large amounts, especially in the case of commercial properties. REIT removes such limitations, and with a minimum investment of Rs 50,000, you get similar portfolio diversification benefits as pure real estate investment.
- Professionally managed portfolio: Real estate properties under REIT are manga professionally by experts. It ensures smooth investment operations without requiring significant efforts from investors for commercial real estate management.
- Generates consistent incomes: The major portion of the income of REITs comes from rental collections. 90% of this income mandatorily goes to investors as dividends and interest payments. This way, REIT offers a regular income to investors.
- Offers capital gains: REITs are traded in the stock market just like stocks, wherein their price changes depending on their performance. A well-performing REIT has high value and sold a profit, offering capital gains to investors.
Why should you invest in REIT?
One of the primary benefits of investing in REITs is they allow big and small investors to invest in, diversify their investment portfolio, and profit through commercial real estate. REITs also help investors get a few tax exemptions that you would not find in other real estate companies. In short, REITs provide investors with a safe and diversified portfolio through minimum investment amount and proper professional asset management, ensuring excellent returns on investment. If you have a keen interest in real estate, this is the best opportunity to utilize without going through the hassles of purchasing and maintaining these immovable properties.
REITs are an excellent investment vehicle for exposure and a steady income from real estate without much ado. However, since REITs are still getting their hold in the Indian market, the investment options and liquidity is limited. As a result, they bind investors from monetizing their investment. Thus, if you are interested in REIT, include only a minor part of it in your portfolio.
Got more queries related to REIT? We have got you covered in this FAQs section.
What is the difference between real estate mutual funds and REITs?
- Ans: REITs and real estate mutual funds both offer investors access to real estate where they don't need to own, operate, or finance properties. However, REITs provide a steady source of income through dividends, whereas real estate funds create wealth through appreciation and offer better long-term returns.
What are the minimum and maximum investment amounts for REITs?
- Ans: The minimum amount for REIT investment is Rs 50,000 with no cap on the maximum investment amount.
How to invest in REIT?
- Ans: You invest in REITs by purchasing the units from a broker or intermediary platform such as Glide invest.
What are the ways to invest in REIT?
- Ans: Investors can invest in REITs through stocks, mutual funds, and ETFs.
Do I need a Demat account to invest in REIT?
- Ans: Yes. Since REITs are listed and traded on stock markets, you would need a Demat account to purchase the stock units.