While it will offer portfolio diversification, remember that returns are not guaranteed and you must hold for the long term
With a view to increasing participation in alternative investment products, markets regulator Securities and Exchange Board of India (Sebi) has directed a reduction in minimum subscription limit for Real Estate Investments Trusts (Reits) and Infrastructure Investment Trusts (InvITs).
While investors have the option of investing in equity, debt/fixed income and gold through different routes, alternative assets classes provide an efficient way of getting some income from assets like commercial real estate and infrastructure assets. DNA Money spoke to wealth and investment experts on the pros and cons of the lowered minimum investment requirement. Read on.
Diversification opportunity for retail investors
Sebi has reduced the minimum subscription limit for Reits by 75%, from Rs 2 lakh to Rs 50,000. It has also cut the minimum subscription limit for InvITs by 90%, from Rs 10 lakh to Rs 1 lakh.
Reits are backed by real estate projects and InvITs are backed by infrastructure projects. These instruments are in the nature of fixed income investments and investors earn returns from the interest generated by the funds.
IRB InvIT Fund and India Grid Trust are the two listed InvIts and Embassy Office Parks is a listed Reit.
"Clearly, reducing the minimum investment amount will allow more investors to use these routes to diversify their investment portfolio. If more investors come into play, liquidity of the instrument/avenue also goes up," says Ankur Maheshwari, CEO, Equirus Wealth Management.
For many investors, alternative asset class products will act as a return enhancer. "The Sebi move of reducing the minimum amount for participation is a progressive step in enhancing the retail participation in these instruments.
This will help a good amount of retail money move into these assets chasing relatively better returns compared to traditional fixed income avenues" says Joseph Thomas, head research - Emkay Wealth Management.
While many can argue that Rs 2 lakh for REIT was a small amount compared to tens of lakhs or even crores needed to buy one piece of commercial real estate, the fact is that Rs 2 lakh was still high. Let us understand with an example of mutual funds, which are emerging as a popular way to invest.
The ticket size for equity-oriented funds is Rs 1,51,333 per account. Across funds, retail investors' average account size is Rs 78,575. So, lowering the minimum amount for Reit and InvIT helps. Sanjeev Chandiramani, national director, Knight Frank India says: "Reits and InvIT are long-term assets which can serve retail investors well. Reits and InvITs are successful abroad also. With the Real Estate Regulation and Development Act, 2016 (RERA) in place, the sector as a whole is regulated properly."
By lowering the minimum amount, Reits and InvITs are no longer the Hayabusas or Harley Davidsons (premium bikes). Rather, Reits and InvITs are now the Pulsars and Splendours.
Nitin Shanbhag, senior group vice-president - investment products, Motilal Oswal Private Wealth Management says: "Sebi's decision to reduce investment limits in Reits and InvITs is a positive since retail investors would now be able to participate in these asset classes which earlier were normally unaffordable for them."
Since Reits and InvITs are professionally managed, they are also likely to provide a portfolio diversification opportunity to retail investors beyond traditional asset classes such as equity and fixed income, Shanbhag added.
Risk factors to watch out for
With the gates now open to selling Reits and InvITs to retail investors due to lower investment size, it is important to explain the product nature to such investors. For instance, Fixed Maturity Plans (FMPs) are not bank FDs, yet they were sold as an alternative to deposits. The same type of situation could happen in case of Reits and InvITs if the regulations are not in place and are not implemented carefully.
Vijai Mantri, chief investment strategist and founder-promoter, JRL Capital says: "It's a welcome step. However, InvITs and REITs are long-term products. Very few investors have the wherewithal to comprehend and assess the risk in these products."
Care needs to be taken so that investors do not complain later. "It is vital that Reits and InvITs are not marketed and sold to those who do not understand this product. The product features must be explained to investors in detail. The onus is on the distribution network to hand-hold investors into this new category," says Maheshwari of Equirus Wealth Management.
Some key areas that investors need need to keep in mind at taxation, the lack of guaranteed returns and how the underlying assets of Reits and InvITs work. The stock market is understood by some investors, but a good understanding of the debt market is limited to affluent investors only. At this time, explaining how Reits and InvITs work, and how they are a tool for diversification are important. It can be expected that regulations will soon come into force so that misselling of Reits and InvITs do not happen at a large-scale.
Better Returns In Long Term
- Minimum subscription limit for Reits reduced from Rs 2 lakh to Rs 50,000, for InvITs from Rs 10 lakh to Rs 1 lakh
- Alternative asset class products will act as a return enhancer for retail investors
- Can help in portfolio diversification, but returns are not guaranteed and investment must be for long term
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "construction")
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}