Have you considered investing in Real Estate MFs?

With as less as Rs 10,000 in your pocket, you can now share a pie of real estate market. SEBI finally gives the green signal to Real Estate Mutual Funds. 

In the era of a booming property market, if you invest directly, you are entitled to long-term capital gains tax only after three years. But imagine buying a share of real estate project in a plush Mumbai suburb for 10,000 rupees and being entitled to long-term capital gains tax in just one year! Through the recently announced Real Estate Mutual Funds, taxation on property investment may bring you a sigh of relief.

Milind Barve, MD, HDFC MF said that the tax rate on physical form is 20% + surcharge +cess while tax rate on a REMF a long-term capital gains tax is as low as 10% + surcharge +cess. So one has an advantage, against the three years long-term it is a one year long-term and the tax rate is almost half of what you would have to pay.

What's more, the dividend from such funds will be taxed at 12.5% for retail investors and 20 % for HNI’s and institutional investors.

SEBI said that of the fund's assets, 75% would be invested in real estate and related securities and the balance 25% can be invested in equity or debt of non-real estate companies or simply held as cash. However, fund managers cannot invest more than 30% assets in a single city and more than 15% in a single project.

At least 35% would be invested directly in ready real estate projects, and the rest either in projects under development or real estate related securities. These can be unlisted shares of real estate companies. Typically when the fund wants to take an exposure to an underdevelopment project. Also, it includes debt, debentures or shares of real estate companies and mortgage backed securities. Besides, funds would have to appoint custodians to safeguard the title of the projects invested.  

Meanwhile industry watchers say that these products may raise Rs 25 to 30 crores in the next 2-3 years. HDFC and ICICI Prudential could be the first two asset management companies to launch these products, with relative experience in the sector. However, they point out that SEBI would carefully assess REMF’s as they are new, and it involves a risky and relatively non liquid asset class like real estate.

By Pooja Meswani CNBC-TV18