Building dreams

Mumbai, April 25: The Securities and Exchange Board of India (Sebi) today cleared the way for asset management companies to launch real estate mutual funds (REMFS).

Introducing the initial guidelines for REMFs, the capital market regulator specified that the product would essentially be a close-ended scheme with its units listed on the stock exchanges.

Asset management companies launching these funds will declare the net asset value of the scheme on a daily basis, with the load structures and minimum investment being similar to traditional mutual fund products.

Almost four months after it approved the launch of real estate investment trusts, the regulator today allowed mutual funds to tap the potential of physical assets in the real estate sector.

Existing mutual fund houses with adequate expertise can now launch REMFs, while the sponsors seeking to set up new mutual fund houses for REMFs are required to carry on their real estate business for at least five years.

Introducing the initial investment guidelines for REMFs, Sebi said, “At least 35 per cent of the net assets of the scheme shall be invested directly in real estate assets. The balance may be invested in mortgage-backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. Taken together, investments in real estate assets and real estate-related securities shall not be less than 75 per cent of the net assets of the scheme.”

Considering the fact that the units of REMF have to be listed on an exchange, the product will essentially be treated like an exchange traded fund (ETF).

An ETF is traded like a stock on the exchanges and its value derives from the underlying price of the commodity, which in this case will be the realty asset. This also means that an investor willing to buy units of an REMF needs to have a demat account, which is not mandatory for investing in other conventional mutual fund products.

After gold, realty would be the second asset to be brought under the ETF category in India. The ETF concept is relatively nascent in India and is yet to catch on. It is difficult to say whether the REMFs will succeed. However, supporters of REMFs reckon that they will do well because real estate investments have traditionally yielded lucrative returns.