Describing Real Estate Asset

A Mutual fund is an investment product that pools money from different investors and invest that money in variety of assets. Real Estate asset is one of them. We invest our money in Mutual Fund and professional Fund Managers Invest those money in Real Estate Sector.

So, in simple words instead of buying a land or property by ourselves we investment in Mutual Fund and they invest in Real Estate Sector and we get an exposure to the real estate markets.

Type of Real Estate Asset Mutual Fund Invest

1. Real Estate Investment Trusts (REITs): These are the companies that operate income generating properties like malls, office buildings and apartments.

2. Real Estate Company Stocks: These are the companies involved in property development, construction and sales.

3. Direct Real Estate Projects (in rare cases).These companies earn income from rent, property sales, leases

Describing With Example

1. There are 100 investors each investing Rs 100000/- (1Lakh). So Total Asset sums up to Rs 10000000/- (1Cr). So total investment is 1 cr.

2. Fund Managers diversify these investors fund at different interest rates under Real Estate asset of mutual fund as follows

3. 40 lakhs in REITs, 30 lakhs in Real Estate Company Stocks, 30 lakhs in Direct Real Estate Projects.

Weighted average return:( 40% x 9%) +( 30% x 8 %) + (30% x 8.5%) = 8.5 %

5. And NAV unit price was Rs 10 per unit. So total unit issues were

Total Investment / Price per unit

10000000/10

= 10,00,000 units.

6. Total Asset of the fund before expense or Annual Rental Return from Real Estate Asset Investment by Mutual Fund companies to REITs, Real Estate Company Stock and Direct Real Estate Projects as follows.

7. Total Asset of the funds before expense 8.5% of 10000000/- = Rs 850,000/-

Liability Cost is charged as 1 % by mutual fund company.

Total Liability Cost = 1% of 10000000 = 100000 /- i.e. (1 lakh)

Total Fund = (Total Asset – Total Liability)

= (850000 – 100000)

= 750,000/-

8. NAV growth rate for 5 year is reflected as 7.5% (Since the net return after expense is 7.5%). Initial NAV was Rs 10 per unit and after 5 years it grows at 7.5 % yearly at compound interest rate and now the final or new NAV is

= 10 (1+ 7.5%) ^5

14.35 per unit

9. Total Units Issued were 1000000 and Total Investors were 100 so each investor holding 10,000 units.

Now after 5 Years value per investors is

= 10,000 x 14.35

= 1,43 ,500/-

So total Fund Value after 5 Years increases from 1Cr to 1.435 Cr.

i.e. Rs 1,43,50,000/-

10. The Mutual Fund are investing the investor’s money in buying real physical properties or holding units in real estate investment trust and then earning a rental income at an 8.5% (Combined) interest rate for 5 years. So, these rental incomes together paying 8.5 lakh per year for 5 years which sums up to Rs 8.5lakh x 5 which is 42.5 lakhs. So, in total they are returning the principal amount of 1 Cr along with 42.5 lakh interest for 5 years. So Mutual Fund Company are getting 1.425 Cr as rental income return to their investment.

11. But the Mutual giving its investors 1.435Cr and not 1.425Cr because

Real Estate Assets pay in simple interest 8.5% yearly but Mutual Fund also reinvest yearly interest compounding the returns internally (after deducting expenses) that’s why funds NAV grows faster than simple interest. So, in this example mutual fund grows more than 1.425 Cr and reached 1.435Cr.

12. Although the Mutual Fund getting less interest amount after 5 years from rental income as the Real Estate Assets paid in Simple Interest and not in compound interest. What Mutual Fund Companies do is that they reinvest this 8.5 Lakh incomes on new Real Estate assets every year at same 8.5% return.

13. If calculated after 5 years then Mutual Fund Company earning Rs 1,50,36,067 i.e. Rs1.5036 Cr from 1.425cr (calculated earlier).

14. Mutual Fund Companies earning from rental income is Rs 1,42,50,000 /-.

15. Fund Managers reinvest this amount for 5 years at same interest to earn Rs 1,50,36,067/-.

Finally, they are giving Rs 1,43,50,000/- to the investors.

Facts to Remember

1. When you invest in a Real Estate Mutual Fund (or REIT), the mutual fund is buying real physical properties or holding units in Real Estate Investment trust (REITs).

2. These properties are rented out to business, companies’ warehouse, shops, banks or even governments.

3. Tenants (not the properties themselves) pay monthly or quarterly rent to the mutual fund.

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