How to have Real Estate income without its headaches?
Investing in real estate has never been easy. While owning a piece of land, house, an office or commercial property does cater to everybody’s innate desire to have physical real estate, it has a lot of headaches which accompany it without an invitation. Lack of trust with builders, low returns/rentals, high maintenance costs, disputes between landlords and tenants, uncertainty of under-construction projects, and liquidity concerns are the major pain points associated with holding physical real estate from an investment perspective.
Everybody looks for a better solution to this, just the way Gold ETFs, Gold Mutual Funds or Sovereign Gold Bonds have come up as an alternative to physical gold. There is already a partial solution to this problem – REITs, the recommended painless form of holding commercial real estate, though it comes with certain limitations.
A real estate investment trust (REIT) is a SEBI regulated collective investment scheme, that enables an investor to invest in a portfolio of ‘income-generating’ real estate assets by purchasing its units. Investment is made in assets such as shopping malls, office spaces, hotels, apartments etc. In REITs, these assets are bought or rented from the pool of funds contributed by the unit holders with the aim of generating income. To better understand, REITs are similar to mutual funds; but instead of stocks and bonds, REITs have real estate assets, held directly or indirectly as their underlying investments.
Just as the price of stocks rise or fall over time, the units of the REIT also appreciate or depreciate in value on the stock exchange where they are listed. Since unit holders indirectly own a portion of the property that REITs buy, the investments grow in tandem with the value of the properties that the REIT holds. This is the basic framework on which the model of REITs is based – you get rentals and there is also the possibility of capital appreciation (or depreciation) as per the market value of the REIT units.
Thus, the way they are right now allowed in India, REITs help you invest in commercial income generating real estate without involving the pain points involved in managing a physical real estate. There are many more rules and regulations to it which are easily available on the internet.
(Contributed by Shaheen Akhtar, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)
What’s in a Name?
Many people say, नाम में क्या रखा है? but name does matter a lot. You would be surprised to know that corporates spend tons of money before finalizing the right name for their new products/projects.
Facebook renamed itself Meta to project as something more than just a social media platform, Tata Sky is now Tata Play, and Hum Fauji named itself so to reflect the kind of clientele it serves and nobody else!
A similar kind of renaming was done in the Mutual Fund industry recently. SEBI mandated a change of one of the investment options called ‘Dividend Option’ in mutual funds to more appropriate but tongue-twisting ‘IDCW – Income Distribution cum Capital Withdrawal’.
So, what changes now?
‘Dividend Option’ seemed to imply that the investor was getting some extra income. Most of the investors always had the misconception that, like in the stocks (shares), ‘Dividends received from mutual funds are extra income over and above the capital appreciation they get due to a fund doing well’. In reality, dividends received from mutual funds were never any extra income. They were, in fact, some money taken out from the value accumulated in a fund and given to the investor after deducting tax.
Most of the investors never required this money anyway because if they did, they could have simply taken it out from their fund themselves in a quantity and at a time when they wanted, rather than the mutual fund company deciding those two things. This is the reason the NAV of the dividend scheme falls by the extent of dividend paid to investors. Now if you go back again and read the full form of IDCW, you would be able to appreciate why SEBI has decided to rename it.
We have always, right since our inception, encouraged investors to invest only in the Growth option of Mutual Funds. Hopefully, investors will be able to make the right choice now onwards. Thanks to SEBI..!!
(Contributed by Prateek Rediwal, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)
Taking some risk is always inevitable for a healthy life
We use various electrical appliances like Geysers, Washing Machines, Irons etc even when we know there is a risk of getting a shock/accident from it. But we don’t stop using them or let them create a phobia for us. We just do good research, look at their Star Rating for power consumption, check ISI mark for quality and get online Customer Feedback before purchasing.
Some risk, however small or big, is involved in each and everything but it should not become our phobia. We rather have to have a process built up to deal with such risks effectively and let the life go on smoothly.
Similarly, in investments, some investors develop a phobia regarding market linked investments and become 100% inclined towards, say, the bank FDs only, considering them to be safest bet.
But when a bank collapses, a depositor’s only protection is the insurance coverage of Deposit Insurance and Credit Guarantee Corporation (DICGC). From 4th February 2020, this cover has been increased from Rs 1 lakh to Rs 5 lakh (principal + interest). But even then, this could be wholly inadequate. Say you have parked Rs 40-50 lacs in bank deposits, the maximum amount that you can claim in case of any uncertainty at bank’s end is Rs 5 lacs only. And this is for all the accounts in the same bank clubbed together. This protection is offered per bank, rather than per account type.
Of course, the hidden risk of net negative interest rates associated with bank deposits considering the tax and inflation part is not even considered here.
So, just leave aside unfounded phobias and make worthwhile financial decisions actually profitable to you, maybe by connecting with trusted wealth management professionals.
(Contributed by Radhika Chandak, Associate Financial Planner, Team Vikrant, Hum Fauji Initiatives)