REITs - Smarter Way to Own Property

One of the most dreaded statements that Wealth Advisors come across from clients is “hum to apna paisa property me lagate hai” (I invest my money in property). Thanks to the pathetic performance of real estate market in last two years , such people regret their investment intelligence heavily. Some of the issues pertaining to investing in real estate market are as follows -

1. Big ticket size - typical investment in real estate may vary from 30 lakhs to 3 crore. Many a times it forms a very large chunk of one’s investment portfolio and hence make the portfolio quite risky
2. Illiquid - thanks to their big ticket size , real estate as an asset class becomes illiquid
3. Volatility - Real estate as an asset class is highly correlated with GDP growth rate , hence even a slight decrease in the same can ensure havoc for real estate market.
4. Management Requirement - Unlike other investment avenues, property needs constant engagement due to various government regulations, rules, taxes , utilities etc.
5. Ownership Risk - This is a kind of risk which is unique to Indian context. Remember the movie “Khosla ka Ghosla” ? For those who don’t, it means risk of somebody squatting on your property.
6. Possession Delays - Almost all real estate projects in India suffer from the inevitable delay in construction completion and hence delay in possession to investors.
7. High Transaction Costs - Property registration in different states costs 5-7% of the property value , which is a very high transaction costs and make regular buy-sell pretty expensive.

Add to these issues, regular issues of investments like knowledge gap, time needed to buy etc. and you manage to get a glimpse of how big maze is the process of buying a property.

Real Estate Investment Trusts (REITs) are an avenue that try to surmount most of the issues that plague Real Estate industry.

REITs mobilise money from retail investors and make investments in real estate from the corpus thus mobilised. In return they issue ‘Units’ to investors which can be bought and sold over stock markets. Last union budget brought renewed focus on this instrument by declaring a policy framework for them to operate in India.

Major characteristics of REITs are as follows -

1. Minimum investment of Rs. 2 lakhs by an investor -
1. Lower ticket size , hence more liquid and provides diversification by restricting the percentage of total portfolio in one asset.
2. Sponsors -
1. Required for floating the REIT in initial days.
2. An REIT can have a maximum of 3 sponsors , having at least 25% stake in assets - will ensure that sponsors skin is there in the investments so he will work in tandem to make REIT perform.  
3. Should hold assets for at least first three years of the REIT.
3. Manager -
1. Invests the corpus on behalf of investors based on his professional knowledge and decision making
2. Is responsible for the overall performance of the REIT.
4. Trustee -
1. Independent of Manager and Sponsor, ensures that all rules are followed and interests of investors are safeguarded.
5. Regulations -
1. To be regulated by SEBI , the same body that regulates stock markets in India

To ensure proper safeguard of investor interest govt has notified following rules -

1. At least 80% of the investments in completed projects
2. Investments to be in at least two projects
3. To be listed on stock exchanges for trading purpose
4. Minimum Rs. 250 crore for offering to retail investors to invest and minimum REIT size of Rs. 500 crore, so as to ensure that only serious players enter

So thanks to the way that they are  structured and their characteristics  REITs surmount all the major challenges faced by Real Estate investors.

In a nutshell , REITs bring professional management, diversification, strict regulations, liquidity and stability to real-estate investments , which has been for long marred by complete chaos. But being a novice product category , investors need to wait and watch before deciding their suitability.

Got a query on REIT or any other investment avenue? Drop an e-mail to healthynivesh@gmail.com. Like the Facebook Page Healthy Nivesh , so as to keep getting future posts as well. Keep sharing feedback and brickbats in comments :) 

Debt Funds - The Tax Warrior against FDs

Fixed Deposits have long been associated with assured returns for most of our contemporary and previous generation population. A “tension free” return of 8-10% has meant the holistic investment planning for many of us. But this “tension free” return comes at a huge cost in the form of ensuing taxability. Below is an illustration how Taxes eat into our FD returns.

                                                             

Annual Interest on FD		10%	20%	30%
	8%	7.2%	6.4%	5.6%
	9%	8.1%	7.2%	6.3%
	10%	9.0%	8.0%	7.0%

* If you feel difference of 1-2% is nothing you might want to know about power of compounding

So as the above illustration shows, net return of FDs keeps on decreasing with rise in applicable tax bracket, making the ‘safe’ return of FDs even lower. There are two more points to take note of as far as taxation of FDs is concerned:

1.     One has to declare interest earned on FDs every financial year irrespective of investment or maturity date of the FD. E.g. you make an FD in Dec’12 for three year duration, so you are supposed to declare interest accumulated in the financial year 12-13, 13-14 and 14-15 separately in the respective financial year income tax return.

2.     Contrary to popular perception there is no tax free interest on FDs. Some people think that interest earned upto 10,000 in a financial year is tax free. But reality is that limit is for saving account interest only, not FDs.

So is there is any alternate which is as safe and more tax efficient ?

Yes there is and its known as Debt Funds.

Before exploring how Debt funds are more tax efficient than FDs, lets first explore what Debt funds are.

Banks offer FDs for raising money, in the same manner companies offer different Debt instruments like Commercial Papers, Debentures, etc to raise money for their capital needs. Following is the nature of these instruments –

• Rated by independent rating agencies like CRISIL etc for their creditworthiness
• Intermittent in nature – Unlike bank FDs they are not available for subscription continuously. Companies offer them only when they need capital for some specific or general working capital requirement.
• Rate of Return offered by these instruments depend on the ratings. So higher is the rating, lower is the rate of return

Debt funds function in below manner –

1. Mobilise money from retail investors like me and you
2. Invest the money thus collected in different debt instruments like the ones defined above, apart from government bonds , money market instruments etc.
3. Allocate ’Units’ to investors based on their quantum of investments
4. Payback money to investors when they redeem their investments

Now coming to taxation part, Debt funds score over FDs because you can use Inflation to pare down your returns for tax calculation. Instead of going into theory, lets try to understand it by an example -

*Capital Appreciation considered for Tax Calculation

Fixed Deposit = [(D) - (B)]

Debt funds = (D) - [(B) *[(Inflation Index during (D)/Inflation Index during (A)]

Inflation Index = A parameter based on ensuing inflation for respective financial year , declared for every financial year by government.

Redemption = Process of taking out investment

Capital appreciation = Amount considered for calculating tax

Returns After Tax = Returns realized after paying applicable tax

So as we can see from above example, even though a Debt fund’s returns were supposed to be lower than a FD, in reality it gave better returns because of lower taxation.

But above taxation is applicable only if investment is made for more than 3 years, otherwise it remains same as that of FD.

Wait for our next article to learn What are types of Debt funds and how to invest in them.

Inflation Index i.e. Cost of Inflation Index (CII) is as below for different financial years –

You might also like to read about my perspective about Financial Planning. And as always thanks for reading and if you like it shout out :) help your friends by connecting him/her to us via facebook or email : healthynivesh@gmail.com

Sukanaya Samriddhi Scheme- For the Luxmi of the Family

India is a country of ironies. This phenomenon gets manifested in worst manner possible in our attitude towards our girls. While we worship female form as a manifestation of power (Durga), love (Radha), money (Laxmi), knowledge (Saraswati) and lot more, we also sadly have one of the worst gender ratio - thanks to rampant female foeticide and infanticide.

It is to counter this harsh reality that government has introduced Sukanaya Samriddhi Scheme , which aspires to provide a secure, long term and ASSURED investment option for girl child. Lets have a look at the details.

Eligibility

Account can be opened subject to following conditions -

• In the name of girl child up to 10 years of age
• Maximum of one account per girl child
• Maximum of two accounts by one set of parents – third account can be opened provided two the girls children are twins or all three are born together.

Account Opening

Following documents are required -

• Birth Certificate of girl child
• ID and Address proof of the guardian of the child-who will operate the account on her behalf till she attains the age of 10 years, after which both guardian and girl child can operate the same
• Account can be opened either in a post-office or PSU bank
• Account can be transferred all over India in case account holders shifts her base

Rules

1. Minimum contribution of Rs. 1000/- in a financial year
2. A penalty of Rs. 50 if minimum contribution not made in a year
3. Maximum contribution of 1.5 lakhs in a year
4. Deposits can be made only for a period of 14 years from the date of account opening
5. No deposits shall be accepted from the 15th year of account opening

Withdrawal

• Permitted upto 50% of total amount when girl child turns 18.
• Fully withdrawable when girl turns 21 or when she gets married, if she get married before turning 21.
• After girl turns 21, account can be closed, otherwise it will continue getting interest on the accumulated amount, but no more deposit will be accepted.

Interest and Taxation

• For the current financial year, government has declared 9.1% as annual interest rate
• Full amount deposited under the scheme is tax exempted under Section 80(C)
• All the interest income on the deposit is also tax free
• The amount withdrawn from the account is also tax free

To summarise the scheme provides a very lucrative option for parents of girl child, but as always this scheme has to be analysed for the suitability in a holistic manner instead of temptation of promised high returns. Against the pros of High assured rate of return and Tax benefit , cons score in the form of illiquidity and hardship of facing PSU banks , which are most of times not willing to help even for smallest of the work, leave alone account opening.

Ever wondered why for some people PPF and Sukanya Samriddhi are best investment while for others it is Equities- Risk is the answer. Know your risk here. We do individual investment advice as well. Write to us at healthynivesh@gmail.com. For weekly investment advice like us on facebook. We promise we won’t spam :)