Mahindra Manulife and PGIM are launching REIT fund of funds: Should you invest?

Also, the mutual fund REITs being rolled out offer geographical diversification.

“As our underlying fund will invest in different countries, it can find opportunities across a variety of sectors,” says Ajit Menon, chief executive officer of PGIM MF.

Menon points out that the PGIM Select Real Estate Fund (PSREF) – the underlying fund for its global REIT fund – has exposure to real estate investments in businesses such as personal storage, senior living and data centres, apart from sectors such as residential, industrial, hospitality, healthcare, retail and office spaces.

The PSREF largely invests in developed real-estate markets, apart from the Asia real-estate market. In last five years, PSREF has delivered annualised returns of around 7.4 percent in dollar terms.

Benefit of foreign exchange rates The NAV of the underlying fund reflects the dollar value of the investments.

“The NAV of the FoF for the Indian investor will show the rupee value. So, domestic investors will also gain from the currency fluctuations as and when dollar strengthens against the rupee,” says Ashutosh Bishnoi, managing director and CEO of Mahindra Manulife MF.

MAPRF also invests in specialised REITs, which have exposure to non-traditional REIT sectors, apart from retail, industrial, office and hospitality sectors. The Manulife fund is relatively new, being launched in September 2018.

What about taxes?

Financial planners say the way mutual fund dividends get taxed is another reason that investors should look at mutual fund REITs for long-term capital gains and not as regular-income products.

“In mutual fund REITs, the rental pay-out gets credited into the NAV. Under certain conditions, unitholders get tax exemption on dividends from the domestic-focused REITs, but it is not the case with mutual fund REITs,” says Deepak Chhabria, chief executive officer and director, Axiom Financial Services.

If the REIT has not opted for the concessional corporate tax rate, dividend income is tax-exempt in the hands of investors.

As far as mutual funds are concerned, the dividends are taxed in the hands of unitholders, depending upon their income tax slabs.

For those in the highest slab, the effective tax rate can be as high as 42.7 percent. Only if your overall income is less than Rs 5 lakh, is the dividend income exempted.

On the other hand, the capital gains from an overseas FoF is treated as debt investment for taxation purpose.

After three years, the long-term capital gains (LTCG) tax rate will apply and investors will have to pay 20 percent on the gains with the indexation benefit.

What should investors do?

Financial planners say investors should look at REIT FoFs as investment products that sit somewhere between equity and debt products.

“Investors should have a long-term view, and also be prepared for volatility, as eventually this is a play on one investment theme, real-estate in this case,” says Kirtan Shah, co-founder and chief executive officer of SRE Wealth.

For example, the work-from-home trend following the COVID-19 outbreak has had some impact on office REITs, but sectoral diversification can somewhat soften the impact from such shocks.

Chhabbria says investors can use the REITs FoF for regular income, but not immediately. “If returns are good over time and a good corpus is built, investors can start a systematic withdrawal plan for regular income after three years, at the applicable LTCG tax rates,” he says.

Both the rental income coming from real estate holdings and any capital appreciation of the property gets added into the NAV of the scheme.

Immediately opting for the dividend plan for income can even eat into your own capital investments if the fund goes through a period of low returns.

Investors with a high risk-appetite and a long-term horizon can consider REIT offerings.