Cashing on Real Boom - ICICI Pru and ING Vysya Realty Funds

Real estate investment trusts (REIT)—funds that can invest retail investors’ funds directly in real estate-may be just around the horizon as hinted recently by Securities and Exchange Board of India (Sebi) chairman M. Damodaran. However, mutual funds (MF) have already found other ways to tap the booming sector. Two new schemes that invest in real estate securities were launched recently.

Go global:

ING Global Real Estate Fund (IGREF) is a fund-of-funds (FoF) scheme that will invest at least 65 per cent of its corpus in ING Global Real Estate Securities Fund (IGRESF)—ING’s international MF scheme that invests in real estate securities and REITs across the globe. It can invest the rest in other overseas MF schemes.

IGRESF invests at least 80 per cent of its assets in equity shares of companies that derive at least 50 per cent of their income from the real estate market, either through ownership or management. It can also invest up to 20 per cent of its corpus in global REITs. Being an FoF, it will charge you a maximum of 0.75 per cent as expenses.

The underlying fund’s expenses--these will also be passed on to you and thus impact your NAV—would be approximately 1.8 per cent. If IGREF invests in more schemes, your expense ratio would go up to that extent.

But, what about the troubled real estate sector in the US, especially the sub-prime housing segment? “Presently, IGRESF does not have any exposure to such risky assets,” says Paras Adenwalla, chief investment officer, ING India MF. IGRESF has done well and has outperformed its benchmark index across time periods.

Or stay local:

ICICI Prudential Real Estate Securities Fund (IRESF) is a three-year closed-end, debt-oriented hybrid fund. It aims at investing at least 51 per cent of its assets in debt securities issued by companies that would benefit from the real estate sector, such as residential and commercial developers as well as retail and hospitality sectors.

IRESF will aim to buy and hold such debt securities till maturity as they are typically illiquid and high yielding. “At present, such securities would yield around 12-14 per cent,” says Nilesh Shah, chief investment officer, ICICI Prudential MF. The rest would be deployed in equity shares of companies that would benefit from the real estate boom.

But why has the MF launched a debt-oriented scheme instead of an equity one? Shah claims that the current yields of real estate debt scrips offer a better yield than what equity shares of these companies would yield in three years. And although the credit risk of such scrips is higher, the MF says it will invest in those that come with a good track record.

Premature withdrawals are allowed once in a quarter and attract a 3 per cent exit load over and above your share of the proportionate unamortised initial issue expenses as per Sebi rules. This is because IRESF is a closed-end fund.

Take your pick.