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Roads to realty

The real estate boom in the country in the last two years has turned the sector into an exciting investment option. With property prices escalating, investments in real estate have fetched returns that can even rival the stock markets’.

While not many can invest directly in real estate because of the huge money required for property purchases, the launch of realty mutual funds has made it possible even for small investors to have access to a diversified portfolio.

The options are open to all — whether to invest in a physical property or buy mutual fund units. While taking the plunge, an investor needs to consider a number of factors, including the tax aspects, the liquidity and long-term prospects of such investments.

Let us begin with a comparison between investments in physical property and real estate mutual funds.

Money matters

An important consideration in favour of realty mutual funds is the small money required to enter the sector. A person can begin with investing just Rs 5,000 as in any other mutual fund. However, an investor needs to be well informed and the guidelines on the back of the form about the minimum investment and other details will be of significant help.

On the other hand, investors need to shell out big bucks for physical purchase of property.

While bank loans can be a way out to meet a person’s financial needs in buying property, no such facility is available for purchasing mutual fund units.

A property must be held for a minimum of 36 months from the date of purchase to calculate long-term capital gains, while it takes just 12 months for mutual funds to yield long-term results.

Tax count

A property may serve as a steady means of income from rent but this income is taxable.

However, dividends earned from real estate mutual funds are completely exempt from tax under section 10 (35) of the income tax act. This can act as a big boost for small as well as big investors to go for real estate funds.

However, the tax liability on long- and short-term capital gains is the same for both physical assets and mutual fund units.

Again, a property calls for a tax deduction of up to Rs 1,50,000 per annum taking into account the interests on loans.

There is no such relief for realty funds. However, if the mutual fund units are purchased with the loan, there will still be deductions on the interest amount.

A special feature of physical property, especially that of residential property, is that any loan that is repaid will fall under tax deduction, according to section 80C of the income tax act. This deduction is within the overall limit of Rs 1 lakh. However, no such tax waiver is allowed in the case of loan repayment for mutual funds units.

Duty scale

An investor needs to pay stamp duty to buy a property, while there is no such rule for realty schemes. This is a big factor in favour of the latter. Moreover, unlike a physical property, a real estate mutual fund doesn’t call for payment of a house tax.

Liquidity flow

A property once purchased has no liquidity. This is because every time a property is sold, the process involves registration, mutation and other activities which suck liquidity out of the asset. Investments in real estate funds ensure higher liquidity. A person investing in these units can sell them at any point of time without much of a hassle.

Easy gift

Units of real estate funds can also be a very good gift for relatives as the long-term capital gains tax on these are nil. In contrast, it’s not easy to gift an immovable property as it requires registration with the authority concerned under the transfer of property act.

Moreover, unlike a physical property, it is possible to go in for a systematic investment planning for real estate mutual funds. On the other hand, a person dealing in property purchases has the advantage of getting discounts compared with mutual fund schemes.

Hence, while investing in real estate, it is important to factor in the age, disposable money and the objectives of an investor. Mutual funds offer an easy entry into the sector to small investors compared with the legal hassles involved in buying a property.

However, investors need to shell out entry and exit loads for any real estate scheme.

The Securities and Exchange Board of India has come out with Real Estate Investment Trusts Regulations, 2008 to prepare the ground for the launch of real estate mutual funds.

The high appreciation in physical property makes it a good investment prospect in the long run.Therefore, small investors can now get ready to join the action in this fast growing sector which has so far been the forte of high net worth individuals.

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