ISSUE IV : Real-estate mutual fund: The future of investments


Real-Estate Mutual Fund (“REMFs”) introduced by Securities and Exchange Board of India (“SEBI”)1 gives options to the investors for investing in real-estate. These correspond with the Real-estate Investment Trusts in USA and Pool Management Vehicle in U.K which are popular modes of investment in USA and U.K respectively. The real-estate sector was opened2 in India for foreign direct investment by the government which has led to a spurt in activities. Before REMFs, through the capital market, money was invested in the equities of real-estate companies and not in real-estate. REMF gives an additional mode of raising money through the capital market for the activities in the real-estate sector.

This bulletin deals with REMFs as an investment option, some key regulatory considerations, opportunities for foreign investors to invest in REMF and the basic tax provisions to REMFs.

1. Investment through REMF

REMFs have been allowed to invest in:

  • directly in real-estate properties;
  • mortgage backed securities;
  • equity  shares,  bonds,  debentures  of  listed/unlisted  companies  which  deal  in  properties;  and  also undertake property development;
  • other securities

REMFs provide better alternative for investors as they have been given a wide opportunity from investing in real-estate properties to equity shares etc. of companies dealing in properties. This wide field of investment gives more security to the investors.

The investors allowed to invest in real-estate are High Net Worth Investors (“HNWI”) and Foreign Institutional Investors (“FIIs”). There is ample opportunity for the foreign investors to invest in REMFs. However, REMFs are still not open for the retail investor.

HNWI is the class of investors prominent in investing in stocks and have a high net worth. The non- institutional investors who invest more than INR 100,000 (US$ 2,500)3 per trade is above are termed as HNWI. FIIs have also been allowed to invest in the REMF. FIIs are governed by the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 (“the FII Regulations”). FIIs are allowed to invest only when they are registered with SEBI. These are granted a certificate by SEBI upon registration which is valid for three years from the date it is issued.4

2. Important Considerations

REMFs are governed by SEBI (Mutual Fund) Regulations, 1996 (“the Regulations”) and periodic guidelines issued by SEBI. Like any other mutual fund REMFs should be in the nature of trusts and are required to be registered,5 they must set up a board of trustees and trustee companies. Asset Management Companies (“AMC”) should manage REMFs. An AMC is a company formed and registered under the Companies Act, 1956 and registered with SEBI.6 AMC cannot act as the trustees of any REMF. It is the duty of the trustee company to act as the trustees for the benefit of the unit holders. The net worth of the AMCs should be at least INR 100 million (US$ 2.5 million).7 AMCs as well as the trustee company are required to get the approval of SEBI for finalizing its charter documents.8 No trustee of a REMF can be the trustee of any other REMF.

Certain important compliances of the REMFs are described below.

2.1 Listing of units

The units of REMFs have to be compulsorily listed on the stock exchange. The REMF has to appoint a SEBI approved custodian who will act as the custodian of securities. The appointment of custodian must be notified to SEBI within 15 days of the appointment9 and REMF should enter into a custodian agreement which must contain clauses required for the efficient and orderly conduct of the affairs of the custodian.

No scheme can be launched by the REMF unless it is approved by the board of trustees. The REMF is required to file the offer document10 with SEBI. If the draft is approved by SEBI then the AMC can issue the offer document.11 This document contains disclosures to help the investors to make an informed investment decision. It should clearly specify the amount it seeks to raise under the scheme and, in case of over subscription, the extent of amount it may retain.12

2.2 Close-ended schemes

SEBI has stipulated that the structure of REMFs should be close-ended i.e. schemes with a defined period of maturity. These schemes are redeemed at the end of maturity period. Such schemes may be wound up in case of termination of the period of the scheme unless it is rolled over for a further period.13

The Regulations prescribe certain modalities required to be followed in case of close-ended schemes. The units of close-ended schemes are required to be compulsorily listed in a recognised stock exchange within six months of the closing of subscription.14 No scheme can be open for subscription for more than 45 days.15 The REMF is required to return the subscription amount to the investors within six weeks from the date of closure if there is over subscription or under subscription.

Further, REMFs must declare the Net Asset Value (“NAV”) of the funds on a daily basis. NAV is the market value of the securities held by the fund in a day which varies daily. The performance of a fund is determined by its NAV and is calculated by dividing the net asset of a scheme by the number of units outstanding on the valuation date.16

3. Tax implications

The tax liability on the investors and the REMF is governed by the provisions of the Income Tax Act, 1961 (“the IT Act”). Mutual funds are trusts and, therefore, their tax implications are same as of any trust. Registered REMFs are exempted from income tax.17 Moreover, REMFs receives all income without any deduction of tax at source.18 However, in case of distribution of income by the mutual funds the tax liability is under the dividend distribution tax19 which at present is 16.995%.20

The income received by the investor through a REMF is not liable to tax.21 However, if the investor sells the units of REMF he is liable to pay capital gains tax on the proceeds of such sale. Capital gains tax can either be long-term or short-term tax. Long-term capital gains tax is applied on the sale of units of REMFs when the units are held for more than 12 months period. FIIs are taxed at the rate of 10% under long-term capital gains tax22 while tax rate for short-term capital gains tax is 30%.23


REMFs provide better alternative for the real-estate companies to raise money from the capital markets for their requirements. As the investment is monitored by SEBI therefore, it will be structured. REMFs are just like any other mutual fund, they provide the benefits generally provided by the mutual funds, like pooling of resources for greater benefit, tax liability on investors which is moderate. REMFs are sector specific funds which inherently have their own share of risks as the returns are dependent on the rise and fall in the sector. However, with the real-estate sector showing commendable growth, the investments are secure. The investment options for the investors have been made broad based as it includes right from investing directly in property to securities of real-estate companies dealing in which will mean lower risk for the investors as it will ensure diverse investment opportunities thereby reducing the chance of losses. Therefore, the REMFs provide the investors an opportunity to be the part of real-estate boom in India.

1 SEBI introduced this on June 26, 2006 by a press release number PR- 166/2006 issued by SEBI.

2 Press Note 2 of 2005 dated March 3, 2005, issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

3 1 US$= INR 40.

4 Regulation 8 of the FII Regulations.

5 REMFs are required to be registered under Indian Registration Act, 1908.

6 Regulation 2(d).

7 Regulation 21(1) (f).

8 The Articles of Association and the Memorandum of Association of the AMC have to be submitted for approval in Form D.

9 Regulation 26.

10 Regulation 2(r). Offer document is the document by which a mutual fund invites public for subscription of units of a scheme.

11 Regulation 29(3).

12 Regulation 35(1).

13 Regulation 39(1).

14 Regulation 32.

15 Regulation 34.

16 Regulation 48.

17 Section 10(23D) of the IT Act. 18 Section 196(iv) of the IT Act. 19 Section 115O of the IT Act.

20 By the Finance Act, 2007 dividend distribution tax has been increased to 15% from 12.5%.And the education cess has been increased to 3% from 2%.

21 Section 10(35) of the Act. 22 Section 115AD of the Act. 23 Supra.




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