Liquid Mutual Funds vs Bank FDs

Liquid Mutual Funds are better than Bank FDs

Most of us generally have a good amount of money lying around in our various savings bank accounts, earning just about 4% per annum. This money may be part of our salary waiting to be spent, maturity amounts of insurance policies or FDs, redemptions from investments or any other credits received from elsewhere. We may not have any immediate plans to spend, invest or reinvest this money. When the money becomes available, we take our own time to plan its further use while it keeps lying in the savings bank account earning a low return.

But did you know that you can earn double the returns of a savings bank account while having almost the same level of safety, liquidity and ease of transaction?

Liquid funds – These are a class of mutual funds that have no exposure to stocks and invest only in debt (fixed income) instruments, generally with a residual maturity of less than 92 days. These investments are mostly in money market instruments, short-term corporate deposits and treasury bills.

Liquid funds provide good liquidity, low interest rate risk and also the prevailing market yield. Along with liquidity, the safety factor makes these funds a preferred parking option for HNIs and corporates as a good alternative to savings bank accounts and short-term fixed deposits. Most liquid schemes don’t have a lock-in period and offer redemption proceeds within 24 hours directly into your bank account.

All mutual funds have liquid schemes and try to provide the convenience of investments and redemptions in line with advancements in technology. You can invest in liquid funds through SMS, online banking, phone banking, call centre services and also physical applications. The same applies for redemptions also.

If it’s so easy and safe, why are these funds not so popular among common investors?
That is simply because of a lack of awareness. Mutual funds are generally associated with investments in stocks, while banks occupy a much larger part of retail investors’ consciousness than mutual funds do.

You should remember some important points while investing in liquid funds. These are essentially short-term investments. If you keep your money here for too long, typically more than a year, you may lose out on better opportunities elsewhere. Another advantage of liquid funds is that if you think your money is likely to be lying around for a longer time than thought initially, you can seamlessly shift it to longer duration debt mutual funds or even equity funds without much hassle.

On the issue of taxation, even with part-redemptions from a liquid fund within a year, the gains will be taxed according to your income tax slab. Beyond a year, the gains get the benefit of indexation as a long-term gain. You can invest in growth, dividend and dividend reinvestment options. Dividends paid by these funds are tax-free in your hands. Liquid funds also score over bank deposits because they do not deduct tax at source (TDS).

Investors who tend to keep a sizeable balance in their savings bank accounts, and that too for a long period, may look at investing in liquid funds to enhance returns. It can make an appreciable difference to what you get to keep in the end.

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Mutual Fund Risks

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Understanding risk in mutual funds

Risk is inherent to investing. Investments vary across the risk spectrum, but there is hardly any investment that’s entirely risk-free. Mutual funds also carry risk. But first, what is ‘risk’? In the world of investments, risk is the other name for volatility or fluctuation in price. An investment that is susceptible to wild swings in either direction is considered to be highly risky. Both equity funds and debt funds carry risk. Comparatively, debt funds are generally not as risky as equity funds. Equity tends to be volatile, especially in the short to medium term.

In order to judge the inherent risk in mutual funds, the most basic tool is the riskometer. All mutual fund schemes carry a riskometer which points at the inherent risk in the scheme. The figure alongside shows a mutual fund riskometer.

More specifically, here is how various equity funds stand in the increasing order of their risk grade:

Understanding risk in mutual funds

Balanced funds are the least risky as they can invest as much as 35 per cent of their assets in debt. Since large companies don’t fluctuate wildly, they come next. Mid and small caps are notorious for their crazy moves, so the funds investing in them appear at the second-last position. Finally, since thematic and sectoral funds take highly theme-specific bets, they are the riskiest of all.

Here is how debt funds stand in the increasing order of their risk grade:

Liquid funds < Ultra short-term funds < Short-term funds < Income funds, credit-opportunities funds, dynamic-bond funds, long-term gilt funds

With debt funds, the risks are two fold: interest risk and credit risk.

Interest risk means that interest rates may move up or down unexpectedly. A rise in interest rates results in a decline in bond prices and vice-versa. So, a fund that holds long-duration bonds is subject to high risk.

Credit risk is the risk of default by the bond issuer. Debt funds that invest in relatively lower-rated paper carry this risk.

There are other risks also in mutual funds, which the investor can minimise by making prudent decisions. By investing across multiple fund houses and schemes, one can reduce the fund-house-specific, fund-manager specific and scheme-specific risk. Also, by sticking to multi-cap equity funds one can reduce the portfolio risk.

SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich – Best ELSS Funds

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Calculate RETIREMENT Amount

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An ideal retirement corpus should take care of all your expenses after you stop working. But can you calculate the amount required? It involves taking into account life expectancy, interest rates, inflation and the time value of money…and can be a bit tricky. Here we explain how to use MS Excel to calculate the amount easily. But first, let’s understand some basics.

The concept of time value of money states that the worth of a rupee received today is more than a rupee received at a later date because of its earning potential. The concept of time value has two elements: Compounding and discounting. Compounding helps to estimate future values whereas discounting helps to estimate present values. For calculating your retirement corpus, it is the present value that matters.

For example, an investment product promises ₹8 lakh in 10 years if you invest ₹4 lakh today. Given interest or term deposit rates of 8% per annum, will this investment product be profitable? You will have to find out the present value of ₹8 lakh at 8% discount rate to arrive at the right answer. Present value is calculated by dividing ₹8 lakh by (1+r) ^n, where ‘r’ is the discount rate (or interest rate) and ‘n’ is the tenure of investment. The present value of ₹8 lakh works out to be ₹3.7 lakh.

Since the present value of the amount that the product promises to pay (fund inflow) is less than the amount invested (fund outflow), the product is not profitable. In other words, the net present value of the investment product is negative. Net present value is the difference between the present value of cash inflows and present value of cash outflows.

If the same ₹4 lakh is invested in an FD for 10 years, offering 8% annual interest, the maturity proceeds work out to be ₹8.63 lakh (assuming no tax)—₹63,000 higher than the aforementioned investment product.

Calculating the present value of an amount gets complicated, if the investment generates a series of payments over a period of time. To calculate the current worth of such an investment, the present value of each payment in the entire series of payments needs to be derived. Technically, one needs to find out the present value of an annuity.

Estimating one’s retirement corpus involves calculating the present value of an annuity. This is because, one expects to generate a stream of payments—monthly, quarterly or annually—from one’s retirement corpus for a given number of years at a certain rate. Such stream of payments seek to take care of one’s post-retirement expenses—based on one’s current expenses and assumed inflation rate.

A 38-year-old with current annual expense of ₹6 lakh can calculate his annual expenditure requirements when she retires at the age of 60, based on an assumed annual inflation rate over 22 years (the period after which she will retire).

For instance, at 5% assumed inflation she will need ₹17.5 lakh—₹6 lakh x (1+5%)^22. The ideal retirement corpus must generate a stream of ₹17.5 lakh annually for 25 years after retirement, assuming life expectancy of 85 years. Such a corpus can be arrived at by adding the present value of each stream of ₹17.5 lakh discounted at an appropriate rate. The appropriate rate is generally the average long-term (10-year) yield on government securities. Additionally, the post-retirement inflation also needs to be taken into account.

Although the methodology appears complex, MS Excel’s NPV function can help you do the calculations easily. NPV requires you to input the discount (or interest) rate and the series of expected inflows or estimated expenses.

At 7% discount rate and assuming no inflation, the present value of the annuity works out to be ₹2.04 crore. So, in our example, the working professional will have to accumulate ₹2.04 crore for his retirement. However, if we assume post-retirement inflation of 4.5% per annum, he will have to accumulate ₹3.12 crore. One can play with the numbers to see how changes in inflation, discount or interest rates changes the desired corpus.

SIPs are Best Investments as Stock Market s are move up and down. Volatile is your best friend in making Money and creating enormous Wealth, If you have patience and long term Investing orientation. Invest in Best SIP Mutual Funds and get good returns over a period of time. Know which are the Top SIP Funds to Invest Save Tax Get Rich – Best ELSS Funds

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Invest in Mutual Fund MIPs for higher Returns


Investors looking for a regular monthly income can choose between Monthly Income Plans (MIPs) offered by mutual fund houses or Post Offices. Both have their own advantages and disadvantages.

While the former can offer higher returns, since they invest in market linked instruments, the latter is safer since it is guaranteed by the government. The Post Office schemes are very easy to invest in, due to which they are preferred by retired people. But MIPs are more tax efficient and hence, suitable for High Networth Individuals ( HNIs) Investors should invest in MIP or Post Office Monthly Income Schemes ( POMIS) based on their risk appetite. While MIPs can offer higher returns as compared to POMIS; it also carries market risk and interest risk. On the contrary POMIS provide guaranteed monthly income, but do not meet the inflation ‘ risk’.


MIPs are open- ended schemes that invest a majority of their assets in fixed income instruments and allocate asmall portion to equity and equity- related instruments. MIPs typically invest in debt instruments like debentures, corporate bonds, government securities and so on, while maintaining a small exposure to equity to earn something extra.

Generally, the equity allocation is maintained between 10 per cent to 25 per cent of the total assets. This is a good option for those investors who are looking at regular and steady income and still want to dabble a bit in equities.

Like all other mutual funds, MIPs too come with the growth and dividend ( Payout and Reinvestment) option. The growth option of an MIP is ideal for a ‘moderate’ risk profile, since it typically falls between a pure income fund and a balanced fund. It is a viable option for HNIs, institutions, trusts and so on, as these investors typically do not require a regular monthly dividend inflow, but still would like capital appreciation at controlled risk levels.

Investors can invest in such funds if they are conservative in their investing style and are looking out for better returns or are looking for a regular source of income. Also, this is suitable for investors in the high tax bracket, since it is more tax efficient than options like fixed deposits and post office monthly income schemes.

MIPs offer an investor regular income through the ‘ dividend’ option. Since they invest in debt instruments, whenever the interest rate falls, the capital gain on bonds rises as price of bond increases and when interest rate raises, capital gain on bond falls.

Taxation of MIP’s

MIPs are treated as debt funds and, hence, the taxation is same as debt funds. Dividends are exempted from tax in the hands of investors, since company pays a Dividend Distribution Tax on such dividend declared.

Redemption is covered by capital gains tax based on the holding period tenure.

Short- term capital gain – if the holding period is less than one year, the capital gain will be considered as a short term capital gain. It will be taxed as per tax slab Long- term capital gain – if the holding period is more than one year, the capital gain will be considered as a long term capital gain. It will be taxed either 10 per cent without indexation or 20 per cent with indexation.

Long- and short- term capital

loss – The good part of MIP is that any short term gains made on MIPs can be set off against short term losses. And long term capital gain on MIPs can be set off against long term losses.

Post Office Monthly Income

Scheme ( POMIS) is a guaranteed return investment available at the post office. On the deposit made in the post office, monthly assured return in the form of interest is earned. Though it offers no tax incentive, it is a preferred instrument amongst small savers because of its government backing that the product offers. However, there is an upper limit for investment into POMIS. You cannot invest more than ₹ 4.5 lakh in asingle account. If you invest jointly, the limit is ₹ 9 lakh. The minimum investment is ₹ 1,500.

Features of POMIS

The capital invested in POMIS is completely protected as the scheme is backed by the Government of India, making it totally risk- free with guaranteed returns. The amount invested is liquid, despite the fact that there is asix- year lock in period. However, the biggest disadvantage of POMIS is that it is not inflation protected, which means that if the inflation is the same as interest rate, then there is no real rate of returns.

Taxation of POMIS – It is taxed along with the regular source of income. However, Tax Deduction at Source is not applicable.

In a falling interest rate regime, monthly income plans will score over post office schemes due to equity exposure

Risk Low risk No risk involved as it is government backed Range of returns 6 per cent to 12 per cent p. a. 8% p. a

Complexity Moderate Simple to understand and invest Assured monthly income Not really assured Assured monthly income Penalty for early 1 per cent before 1 year 2 per cent before 3 years; 1 per cent after withdrawal 3 years and before 6 years Tax on returns Dividends are exempted in Interest income is taxable the hands of investor; as per the tax slab redemptions are taxable as per capital gains guidelines Limit on investment No limit ₹ 4.5 lakh for single account and ₹ 9 lakh for joint

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L&T India Value Fund

Investors are increasing finding it difficult to pick up quality stocks because of their high valuations. In such a situation, it makes sense to be with mutual fund schemes that follow value theme and have high focus on large-sized companies. One such scheme is L&T India Value Fund.

The scheme invests 40-55% of its portfolio in large-sized companies, 35-40% in mid-sized companies and rest in small-sized companies. In comparison with its peers, the scheme has higher exposure to large-sized companies. Due to this, the scheme has performed well even in weak markets. In the past three- and fiveyear periods, the scheme has generated returns of 16.4% and 26%, respectively. During the same period, its category of schemes have given 12% and 19%, respectively.

In the past six months, the scheme’s fund managers Venugopal Manghat and Karan Desai have invested in diversified themes by selecting companies which not only have lean balance sheet, but are also placed well in terms of earnings’ growth in the coming quarters. A few prominent names are Bharat Electronics, KNR Constructions and Sun TV Networks.

SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich – Best ELSS Funds

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Stopping Mutual Fund SIPs

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Can you stop your SIP?

Yes, that is simple. Just fill in an SIP stoppage form or write a letter and you can stop your SIPs. On the other hand, if your bank account doesn’t have enough funds and your SIP is still on, then the fund house may just stop after 3-5 months’ default. If you start an SIP, it’s always better to ensure that there are enough funds in your account to prevent unnecessary premature stoppages.

As far as possible, do not pause your SIPs. It’s a bad habit. It’s always better to build an emergency corpus to meet sudden expenses, so that your SIPs continue and your expenses don’t harm your investment commitments.

SIPs are Best Investments as Stock Market s are move up and down. Volatile is your best friend in making Money and creating enormous Wealth, If you have patience and long term Investing orientation. Invest in Best SIP Mutual Funds and get good returns over a period of time. Know which are the Top SIP Funds to Invest Save Tax Get Rich – Best ELSS Funds

For more information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300


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Impact of Inflation on Savings

Inflation cut 100 to 14 in 30 years

Inflation is often called the ‘silent killer’ because it significantly erodes the purchasing power of money over time. To establish a frame of reference, consider this: At 6.5% long-term WPI (wholesale price index) inflation in India, the purchasing power of Rs 100 has eroded to a dismal Rs 13.80 over the last 30 years! As time goes on, every rupee you have saved will buy you fewer and fewer goods or services — a scary thought indeed!

In search of ‘real’ returns

In general, conventional fixed income instruments in India have not provided investors with ‘real’ returns, that is, returns over and above inflation. Over the last 30 years, an investor who diligently invested in one-year bank fixed deposits (FDs) every year would have generated real returns of just 1.6% per annum on a pre-tax basis, which after taxes would be insignificant.

On the other hand, a real asset such as gold has generated higher real returns of approximately 3.3% per annum over the WPI inflation rate. It’s no wonder then that Indians have developed a strong affinity towards the yellow metal.

Over the same 30-year period, equity generated substantial real returns of approximately 8.45% per annum over the WPI inflation rate. However, this has been accomplished at the cost of significant volatility.

The lack of real returns in fixed income investment products has only enhanced the lure of the yellow metal, and its ever increasing imports have depleted our foreign exchange reserves.
Concerned with this phenomenon, in June 2013 RBI launched the ‘Inflation Indexed Bonds’ (IIBs). These are based on WPI as well as the consumer price index (CPI) inflation rate.

However, the latter is targeted only towards retail investors with a maximum investment limit of Rs 5 lakh, while the WPI series is targeted at institutional investors and HNIs and has no upper limit for investments in these instruments.

UK and US lead the way
Not surprisingly, such securities are very popular globally. The ‘inflation-linked’ securities originated in the UK in the 1980s, followed by other countries such as Australia and Canada. In the UK, these ‘Linkers’ account for approximately 22% of the t o t a l o u t – s t a n d – ing government debt. The US was a relatively late entrant in 1997 and the issuance of approximately $1 billion of TIPS (Treasury inflation protected securities) accounts for nearly 8% of the total government debt.

In India, we have only one security (1.44 IIGS 2023) with an issuance of Rs 6,500 crore, which is less than 0.20% of the total government debt of approximately Rs 35 lakh crore. The 1.44 IIGS presents an attractive value proposition for fixed income investors as it currently trades at a real yield of about 3.85%, which is higher than the past returns of gold. Given historical WPI inflation of approximately 6.7%, a similar bond issued 10 years earlier would have fetched investors a handsome 10%+ return on sovereign risk.

Expect Innovation around IIBs
Unfortunately, the financial services industry has been slow to catch on to the potential of the IIBs and we have hardly seen any product launches around it. Going forward, we expect innovative product construction to encourage investor participation in this space.

Imagine a fixed maturity plan (FMP) of a mutual fund buying these IIBs and holding them to maturity. Investors in such a fund will beat inflation handsomely, would not be concerned with interim volatility, and can enjoy the benefits of indexation as well. Similarly, imagine a children’s education plan that will beat Inflation significantly, thus protecting the real value of the corpus saved for the child’s bright future.

To summarize, IIBs are a low-risk, perfect hedge against inflation and must, therefore, be part of any long-term debt portfolio. The fact that they are currently trading at attractive levels is an icing on the cake and should encourage investors to participate in them.

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FMPs good bets during stock market downturns

WITH equity market performance turning from bad to worse in the present calendar year, the focus has definitely shifted to debt market instruments, which often provide steady and regular stream of income for investors. One such debt instrument that has been hogging the limelight in recent times is the growing popularity of fixed maturity plans (FMPs).

Popularity of FMPs is growing steadily, as more and more investors are becoming aware of the benefits of investing in these plans, particularly in comparison with other popular alternatives, especially, bank fixed deposits. Matter of interest: A growing number of investors from retail to companies and high net worth individuals (HNIs)) are parking their funds in FMPs to safeguard their returns at a time when the domestic equity markets are taking a pounding amid turbulent times in both global and domestic markets.

FMPs are 100 per cent debt-oriented plans, and, therefore, it is unfair to compare them with equity schemes, whose performance is primarily dependent on stock market movements. Also, FMPs are suitable for investors who are risk-averse and conservative, and whose time horizon is short term (six months to 24 months).

On the other hand, equity schemes are suitable for investors who have a time horizon of more than five years, and who are ready to take limited risk with high return potential and also have the patience to wait for at least three to five years.

It is very good to see retail investors pouring funds into FMP products, which traditionally are an investment hot-bed for companies and high net worth individuals. With interest rates set to fall by the second half of 2012, we have seen fund houses launching long-duration FMPs in recent months.

FMPs are like fixed deposit with better taxability.

FMPs are closed-ended funds but they do not have an easy exit option, which fixed deposits have. Therefore, investment in FMPs is similar to investing in fixed deposits.

Stable yields: Investors locking their funds in FMPs can hope to earn prevalent interest rates in the economy, which are broadly in the range of 7 to 9 per cent per annum. For FMPs, with duration longer than one year, the returns are taxed at 10 per cent or 20 per cent after indexation, whichever is beneficial for the investor.

Thus, returns from FMPs are very tax efficient, and, therefore, these instruments are comparatively much better options compared with bank fixed deposits for a similar period, said Chopra.

Investment in short-term FMPs tend to be good investments in a rising interest rate cycle because investors can avoid volatility of an active bond fund and at the same time, benefit by rolling over investments at subsequently higher rates. As the equity market gets volatile, investors seek more assured returns, and, thus, money flows into fixed deposits and debt funds, including FMPs.

Typically, the fund house fixes a `target amount’ for a scheme, which it ties up in formally with borrowers be fore the scheme opens.

Since the fund house knows the interest rate that it will earn on its investments, it can provide `indicative re turns’ to investors.

Investment instruments: FMPs usually invest in certificate of deposits (CDs), commercial papers (CPs), money market instruments, corporate bonds, and, sometimes, even in bank fixed deposits.

At the peak of the rate cycle, it is beneficial to invest in market fixed income instruments or active income funds to benefit from capital gains on bonds as yields/market interest rates fall and bond prices rise. So, FMPs though remain attractive, the total effective re turns on bonds/debt funds could be higher.

Invest Savings from FDs to Debt Funds

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No matter what savers are hoping for, interest rates are going to stay low for years to come. It is time to study the investment alternatives.

A few hiccups along the way notwithstanding, it’s more than likely that India is heading for lower interest rates for years to come, if not for decades. In fact, if one steps out of the ivory tower of economists and into the real life of savers, a huge amount of damage has already been done. A measly 2.5 – 3.5% on savings bank deposits and 5-7% on other deposits are going to be the normal from now on.

Most Indian savers, including retirees who need income, are heavily invested in bank fixed deposits. Their earnings have fallen by 25% or more in the past three years. So is there a solution? As it happens, there is. There are mutual fund products that fit the bill perfectly. They not only give you higher returns than the banking products, but are also liable for a lower tax outgo, making the effective return very attractive. In fact, their liquidity and convenience are also superior compared to fixed deposits, especially if you deal through the special apps that many funds have released for the purpose.

Sebi’s recent reorganisation of fund categories has somewhat changed the lie of the land, so the types of mutual funds that work well as substitutes for bank accounts are liquid funds and ultra-short duration funds. These funds give predictable and stable returns with negligible volatility. The precise definitions that Sebi has now enforced have made them even more stable. Over the past year, liquid fund returns have been an average of 6.85%, while that of ultra-short duration funds have been around 6.47%.

While these compare well with the deposit products they can replace, the real kickers are convenience and tax factors. Liquid funds can be invested in and redeemed through a smartphone-based app for many fund companies. Through these apps, you can invest instantly by transferring money from your bank accounts. More to the point, you can redeem the investments and the money gets transferred to your savings account in five to 10 minutes. So you are able to earn interest that is 1.5 times that of a savings account and, yet, have a liquidity compromise of only a few minutes.

The benefits of funds over fixed deposits go much beyond a simple comparison of returns. The different taxation structure means there’s a bigger difference in post tax returns. The tax difference arises from the fact that returns from fixed deposits are classified as interest income, while mutual fund returns are classified as capital gains. For interest income, you have to pay tax every year for what you have earned that year. If your total interest income from a bank (all accounts and deposits together) exceeds ₹10,000, then the bank also deducts TDS at 10%. In fact, if the bank does not know your PAN, it will deduct 20%. This means that a part of your return is not available for compounding because it is taken out and paid as tax every year.

There is a further advantage to the mutual fund option if you stay invested for more than three years. If you redeem after three years, then the gains are classified as long-term capital gains and are taxed after indexation. Essentially, you get taxed only on inflation-adjusted returns. Again, this does not happen with FDs. Applying all these factors, a three-ear investment in a short-term fund will leave you with almost twice the returns as an FD over the same period, and with excellent liquidity.

Earlier, this kind of fine-tuning could be expected only from a handful of knowledgeable and involved investors. However, with low interest rates, the payoff is huge, and a lot of us could benefit substantially from shifting away from deposit-type products and towards mutual funds.

SIPs are Best Investments as Stock Market s are move up and down. Volatile is your best friend in making Money and creating enormous Wealth, If you have patience and long term Investing orientation. Invest in Best SIP Mutual Funds and get good returns over a period of time. Know which are the Top SIP Funds to Invest Save Tax Get Rich – Best ELSS Funds

For more information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300


You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

REITs Vs Real Estate Funds

SEBI is introducing a new financial product in the market called REITs (Real Estate Investment Trusts). What are REITs? How are they different from the plethora of real estate funds out in the market which have raised vast amounts of money from Indian HNIs? What are the key benefits of REITs? For what kind of investors do REITs offer interesting solutions? Read on as we try to get you answers to all of these questions.
What are REITs?

REITs – Real Estate Investment Trusts – have been in the news lately ever since SEBI issued guidelines for REITs to come in to existence within the regulatory framework. Investors, both wholesale and retail, now will have another avenue to invest in the real estate sector through a regulated fund route.

REITs will help investors channelise their investments into India’s realty sector through a regulated mechanism. As the investment in REITs is asset-backed, it is helpful for investors to invest in real estate without the hassle of going through the checks on property titles and the plethora of regulatory formalities.

The web definition of REITs says, "REITs is an investment trust that owns and manages a pool of commercial properties and mortgages and other real estate assets; shares can be bought and sold in the stock market."

Investopedia defines REITs as a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs typically offer investors high yields, as well as a highly liquid method of investing in real estate."

Types of REITS

There are internationally three types of REITS. In India however, a beginning is made with the third type, the hybrid one.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages. REITS in India will be predominantly of the Hybrid type.

Individuals can invest in REITs by purchasing their shares directly on an open exchange. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). These are equivalent to Growth plans in Equity and other mutual Funds. Besides, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. There are specific segment or location wise investments too. Some REITs will invest specifically in one area of real estate – shopping malls, for example – or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.

I – REITs or REITs in India

On October 10, 2013, SEBI announced the draft consultation paper on Real Estate Investment Trust (REIT) Regulations, 2013. However, earlier in 2008, SEBI had issued certain draft regulations for introducing REITs. I-REITs (REITs in India) would issue securities, which would be listed on stock exchanges and REITs will invest in completed rent generating properties in India (to comprise minimum 90% of net asset value) and mortgage backed securities. Initially I-REITs are planned to be available only to high net worth individuals and institutions to develop the market. Gradually, the doors will be opened to retail investors.

The earlier attempts to introduce REITs in India did not succeed, mainly due to global slowdown and resultant impact on the property markets in India. Also, the proposed REITs then were not permitted to invest in mortgage backed securities, which resulted in to shrinkage of real estate market opportunities.

Structure of I-REITS

Where will REITs invest?

The guidelines from SEBI are clear as regards to where REITS will invest. SEBI has mandated that at least 90% of the value of the REIT assets shall be in completed revenue generating properties. In order to provide flexibility, it has been allowed to invest the remaining 10% in other assets as specified in the proposed regulations, e.g. developmental properties, listed or unlisted debt of companies, mortgage backed securities, equity shares of companies deriving not less than 75% revenue from real estate activities, government securities, money market or cash.

What are the benefits and risks of REITs?

REITs will offer investors another option or avenue to include real estate in their investment portfolio. Further, well managed REITs may offer higher dividend yields which may be higher compared to other investments. As we know, rental yields on long term commercial office space and retail space tend to be much higher than rental yields on residential property, higher than dividend yields on stocks and are often in the range of returns that bank deposits offer. An investor in a REIT can thus look forward to reasonably high annual dividends as well as some appreciation in the long term from appreciation in the capital value of the properties owned by the REIT.

There are several risks in non-traded REITs including illiquidity and non-transparency – which is perhaps why SEBI has not permitted non-traded REITs to be introduced in India.

REITs in the World

In the United States REITs were created when President Dwight D. Eisenhower signed into law the REIT Act title contained in the Cigar Excise Tax Extension of 1960. The objectives of creating REITs were similar that is to give all types of investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in the same way they normally invest in other types of assets, through the purchase and sale of liquid securities.

Since then, several (more than 20) countries around the globe have established REIT regimes, with more countries following in to the footsteps. The spread of the REIT approach to real estate investment around the world has also increased awareness and acceptance of investing in global real estate securities which has given more and more options to investors.

A comprehensive index for the REIT and global listed property market is the FTSE EPRA/NAREIT Global Real Estate Index Series, which was created jointly in October 2001 by the index provider FTSE Group, the National Association of Real Estate Investment Trusts (NAREIT) and the European Public Real Estate Association (EPRA).

In Singapore, commonly referred to as S-REITs, there are 26 REITs listed on the Singapore Exchange, with the latest REIT, Soil build Business Space REIT, listed on 16 August 2013. The first one to be set up being Capita Mall Trust in July 2002. They represent a range of property sectors including retail, office, industrial, hospitality and residential. S-REITs hold in addition to local properties, a variety of properties in countries including Japan, China, Indonesia and Hong Kong.

Other Real Estate Investment Funds

It is now a well known fact that in the last decade not only in India, but worldwide, there has been tremendous expansion in real estate, both in terms of residential properties as well as commercial real estate. The trend continues, despite the global slowdown, though with the similar expansion rate. The considerable funds which are entering the real estate market have opened investment opportunities for all and sundry giving further boost to this sector. The result has been that a slew of real estate funds have been promoted by both foreign and Indian financial institutions which are now competing to invest in the higher return real estate segment. Several financial services organisations – including HDFC, Birla Sun Life, Kotak, ICICI Prudential, ASK, Piramal Group, Milestone etc have raised funds from Indian HNIs for their real estate funds. These are not REITs, but are either funds introduced through the PMS route or the Venture Capital route or the PE route. Many of these structures came into existence before the AIF (Alternate Investment Fund) guidelines were implemented by SEBI.

How are REITs different from other real estate funds?

Investors always have the option of buying houses and commercial property directly, without going through the fund route. This continues to be the preferred mode of investing in this sector. However, benefits of diversification are not available. Paperwork is cumbersome and risks associated with title etc are borne by the buyer. Ticker sizes of investments are soaring with ever increasing real estate prices.

Most of the existing set of real estate funds in India focus on capital appreciation as the desired outcome rather than high annual yields as the desired objective. With this in mind, they typically enter into residential or commercial properties at an early stage of development – effectively becoming financiers to builders and get either their returns from an upside on the final sale of the finished properties or a high coupon from the builder or most often, a combination of both. These deals typically are in the nature of a minimum guaranteed return plus some upside, if any, on successful sale of the property. These are typically structured as PE funds are : which means a 6-7 year investment period, with investment amounts being collected in tranches over the first 3 years, and exits being effected in years 4-7. There is little or no liquidity available in the intervening period. Investors cannot normally expect annual dividends, as the objective is to get an upside by partnering with a builder / developer.

One way of looking at the difference between a REIT and a real estate PE / PMS fund is that it is somewhat akin to the difference between a dividend yield equity fund and a closed ended mid and small cap fund. This is not technically a precise comparison, but perhaps useful in getting the context of the difference between the two.

Another important difference is access. Existing funds through the AIF route and PMS route have a minimum investment threshold of Rs. 25 lakhs – which make them clearly HNI oriented products, with limited liquidity. On the other hand, REITs will be available for investments from Rs. 2 lakhs and upwards. Many more investors who cannot otherwise think of capitalising on high commercial space rental yields, can now do so through a professionally managed REIT.

REITs are packaged with the benefits of listing, regular and stable source of income for investors, diversification of assets, small initial investment requirement (initially SEBI has proposed a minimum investment of Rs.2,00,000), professionally managed, no project execution risk (as fully completed properties are to be included in the portfolio -90% of net asset value). However, non payment of rent risk and market price volatility risk remains.

As with all market related investments options, there are always certain risks to be factored into. Some investments have more some less. REITS falls in to the low risk and moderate return type of investment. As REITs get launched and market participants see them delivering results, they could become a very useful asset class for investors wanting stable income with some capital appreciation prospects in the long run. Over time, advisors may start looking at adding REITs as retirement income solutions.

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