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  • Nov 27, 2023 - Unlock the Potential of Real Estate With These Top 5 Infrastructure Mutual Funds

Unlock the Potential of Real Estate With These Top 5 Infrastructure Mutual Funds

Nov 27, 2023

Unlock the Potential of Real Estate With These Top 5 Infrastructure Mutual Funds

In 2023, India is ranked 5th in the world's GDP rankings, poised for strong growth in the coming years. India's economy boasts diversity and swift growth, fuelled by key sectors such as information technology, services, agriculture, real estate, and manufacturing.

The country's growing population, rising disposable incomes, a youthful and technologically adept labour force, expanding middle class, and rapid urbanisation drive demand for the real estate market, making it one of the most attractive investment destinations in the world.

The Indian real estate sector, which stands as one of the most crucial pillars of the nation's economy, comprises four sub-sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth in the corporate environment and the demand for office space as well as urban and semi-urban accommodation.

Several factors contribute to the real estate sector's pivotal role in the Indian economy. Firstly, it is a potent engine of economic growth, generating employment opportunities for everyone from construction workers to architects and engineers. Real estate projects employ diverse skilled and unskilled labour, driving economic activity and fostering financial inclusion.

Secondly, the real estate sector plays a critical role in infrastructure development, such as constructing roads, bridges, and transportation systems to facilitate efficient movement of goods and people, enabling businesses to flourish and communities to grow well.

Furthermore, real estate contributes significantly to the government's revenue generation. Taxes on property transactions, land ownership, and construction activities provide a substantial source of income for the government, enabling it to invest in public services and infrastructure.

Beyond its economic significance, the real estate sector also holds immense social value. It shapes the urban landscape, creating spaces for people to live, work, and play. Well-planned real estate developments foster sustainable communities, promoting social cohesion and enhancing the quality of life for residents.

The Indian Real Estate Market

The real estate market in India has been experiencing dynamic shifts and changes over the years, driven by technological advancements, demographic shifts, and economic fluctuations after the pandemic.

The value of home sales in India's residential real estate sector reached an all-time high of Rs. 3.47 lakh crore (USD 42 billion) in FY 2023, representing a strong 48% year-on-year increase. The value of the real estate market is expected to increase from Rs. 12,000 crore (USD 1.72 billion) in 2019 to Rs. 65,000 crore (USD 9.30 billion) by 2040.

India's real estate market is anticipated to grow from USD 200 billion in 2021 to USD 1 trillion by 2030, and by 2025, it would account for 13% of the nation's GDP. The sectors of retail, hospitality, and commercial real estate are also expanding rapidly, contributing to the much-needed infrastructure for India's growing needs.

The demand for both business and residential space has led to significant growth in the Indian real estate sector in recent decades. In 2023, private equity investments in India's real estate market were USD 4.2 billion, up from USD 3.4 billion the previous year.

According to the Economic Times Housing Finance Summit, India is facing a severe scarcity of housing, with an approximate requirement of 10 million units in metropolitan areas. The annual construction rate must rise from three to five homes per 1,000 people in order to fill this gap.

By 2030, 25 million more affordable housing units will be needed to accommodate the nation's expanding urban population. The government has taken steps to address the issue, such as launching the Pradhan Mantri Awas Yojana (PMAY) scheme, which aims to provide affordable housing to low-income households.

[Read: 5 Equity Mutual Funds with Higher Exposure to Infrastructure Stocks]

Government Initiatives to Stimulate Growth in the Real Estate Sector...

  • Real Estate (Regulation and Development) Act (RERA), 2016, is a landmark legislation that brought transparency and accountability to the real estate sector, protecting homebuyers from fraudulent practices and ensuring project completion.
  • The Finance Ministry announced to fund the PM Awas Yojana with Rs. 79,000 crore (USD 9.64 billion) in the Union Budget 2023-24, which represents a 66% increase over the previous year.
  • Launch of the Affordable Housing Fund (AHF) in the National Housing Bank (NHB) provides low-cost financing to developers and housing finance companies to promote the construction of affordable housing units.
  • As of December 31, 2022, India had formally approved 425 SEZs; as of January 2023, 270 SEZs are operational. Most special economic zones (SEZs) are in the IT/ BPM sector.

When it comes to investing, real estate has long been considered a lucrative avenue for generating returns. It is a common asset class found in diversified investment portfolios.

Real Estate equities are well-positioned to capitalise on the exploding demand for properties across multiple categories as India continues its development trajectory. This surge in demand has brought real estate stocks into the limelight, offering investors an attractive opportunity to participate in this growing sector.

To realise the potential benefits of this booming industry, investors may participate in this sector by investing in mutual funds that focus on real estate stocks. However, careful research and analysis are essential when selecting these funds.

[Read: Relying on Star Ratings to Pick Best Mutual Funds? Read This]

Here are the top 5 mutual funds with a high allocation to real estate stocks:

#1 Quant Infrastructure Fund (Sectoral Fund)

Quant Infrastructure Fund seeks to generate capital appreciation & provide long-term growth opportunities by investing in a portfolio of infrastructure-focused companies. The scheme currently has an AUM of Rs 993.28 crore and is benchmarked against NIFTY 50 TRI.

The scheme invests across market cap, and as of October 2023, it holds 31.21% allocation in large caps and 30.55% in small caps. Do note it has a higher allocation to small-cap stocks, which are highly risky and sensitive to market fluctuations.

Quant Infrastructure Fund - Allocation to Real Estate Stocks

Stocks Holding %
DLF Ltd. 6.93
NCC Ltd. 4.33
Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The scheme holds a maximum exposure of 6.93% in stocks of DLF Ltd., which is Delhi Land & Finance one of India's biggest commercial real estate development companies, having a market capitalization of Rs.70,000 crores. DLF's primary business is development of residential, commercial and retail properties.

The scheme also carries an allocation of 4.33% to NCC Ltd. Which has ventured into diverse sectors of construction and infrastructural development, spanning across the nation. Currently, the overall exposure to real estate stocks accounts for 11.26% of the scheme's assets.

#2 Tata Housing Opportunities Fund (Thematic Fund)

Launched in September 2022, Tata Housing Opportunities Fund invests in equity and equity-related instruments of entities engaged in and/or expected to benefit from the growth in housing theme. The fund holds a 43.39% allocation to large-cap stocks, 22.54% in mid-cap stocks and 23.83% in small-cap stocks as of October 2023.

However, since the scheme was launched a year ago, it does not have a long performance track record. Thus, investors may consider their suitability before investing in it.

Tata Housing Opportunities Fund - Allocation to Real Estate Stocks

Stocks Holding %
DLF Ltd. 3.77
Prestige Estates Projects Ltd. 3.66
Brigade Enterprises Ltd. 3.37
Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The overall allocation to real estate stocks is around 10.80%, and the highest is in stocks of DLF Ltd. The scheme also holds fair exposure to other stocks like - Prestige Estates Projects Ltd. (develops residential, commercial, retail, leisure and hospitality properties) and Brigade Enterprises Ltd., which are the market leaders in the segment.

#3 Quant Focused Fund (Focused Fund)

Quant Focused Fund seeks to generate capital appreciation & provide long-term growth opportunities by investing in a focused portfolio of large cap - blue chip companies. The fund holds 40.56% allocation to large-cap stocks, 9.42% in mid-cap stocks and 6.04% in small cap stocks, as of October, 2023.

Quant Focused Fund - Allocation to Real Estate Stocks

Stocks Holding %
DLF Ltd. 7.19
Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The overall allocation to real estate stocks is around 7.19% in DLF Ltd. Stocks. However, do note that being a focused scheme it carries a portfolio of limited stocks, which may create a concentration risk. Thus, investors may consider their suitability before investing in it.

#4 HSBC Small Cap Fund (Market Cap Fund)

Launched in 2014, HSBC Small Cap Fund invests in equity and equity related securities, including equity derivatives, in the Indian markets with key theme focus being emerging companies (small cap stocks).

Currently, the scheme holds an AUM of Rs 11,551.58 crore and is benchmarked against Nifty Smallcap 250 TRI.

HSBC Small Cap Fund - Allocation to Real Estate Stocks

Stocks Holding %
Brigade Enterprises Ltd. 2.02
Mahindra Lifespace Developers Ltd. 1.8
NCC Ltd. 0.98
Sobha Ltd. 0.88
Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The overall allocation to real estate stocks is around 5.68%, the scheme holds fair exposure to real estate market leaders like - Brigade Enterprises Ltd., Mahindra Lifespace Developers Ltd., NCC Ltd. And Sobha Ltd. The fund holds 2.87% allocation to large-cap stocks, 24.60% in mid-cap stocks and 69.54% in small cap stocks, as of October, 2023.

Since this is a small cap scheme, investors may consider their suitability before investing in it based on risk tolerance, investment horizon and goals. Small cap funds are more sensitive to market fluctuations and require a long investment horizon due to their inherent volatility.

#5 - SBI Infrastructure Fund (Sectoral Fund)

SBI Infrastructure Fund provides investors with opportunities for long-term growth in capital through active management of investments in a diversified basket of equity stocks of companies directly or indirectly involved in the infrastructure growth in the Indian economy and in debt & money market instruments. Currently, the scheme holds an AUM of Rs 1,308.66 crore.

As of October 2023, the fund has a 39.44% allocation in large-cap stocks and 19.59% in mid-cap stocks, whereas 30.10% in small-cap stocks. Do note it has a higher allocation to small-cap stocks, which are highly risky and sensitive to market fluctuations.

SBI Infrastructure Fund - Allocation to Real Estate Stocks

Stocks Holding %
Sobha Ltd. 2.72
Brigade Enterprises Ltd. 2.59
Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research)

The scheme has an overall allocation of 5.31% to real estate stocks. The scheme has significant exposure to Shobha Ltd., its residential projects portfolio comprises of residential apartments, row houses, villas, luxury and super luxury apartments. And Brigade Enterprises Ltd., the company constructs and develops residential, commercial, educational, retail and hospitality projects.

[Read: Mutual Funds Are Betting Big on These Sectors: Are You Missing Out?]

Although sectoral mutual funds could be a good diversifier to your portfolio, it takes at least a few years to reach their potential. Hence, investors may consider taking a plunge into these mutual funds only after thorough market research and assessing their suitability.

What is the Outlook for the Indian Real Estate Sector?

As India continues to grow and develop, the real estate sector is poised to play an even more crucial role in shaping the nation's future. Real estate businesses have an excellent opportunity with the Smart City Project, which aims to construct 100 smart cities.

An increase in investment activity in the real estate sector is being caused by the growing demand for real estate. Private equity firms, institutional investors, and foreign investors are all pouring money into the Indian real estate market. This capital inflow is supporting the creation of new initiatives, enhanced infrastructure, and increased employment.

The real estate sector is expected to grow substantially over the next five years, driven by strong demand for affordable housing, commercial real estate, and infrastructure development.

Technology plays a pivotal role in the real estate sector; property buying is revolutionised by Augmented Reality (AR) and Virtual Reality (VR), allowing buyers to explore properties remotely and visualise their future homes/office spaces virtually.

Environmentally conscious buyers drive demand for sustainable and eco-friendly properties. The increasing significance of green building certifications, such Leadership in Energy and Environmental Design (LEED), will incentivize developers to integrate eco-friendly features in their projects to cater to this growing market segment.

Indian real estate developers have changed course and taken up new challenges in response to a more informed consumer base and in light of globalisation.

Since the Indian real estate sector is still in its early stages of development, there is a great deal of room for expansion. The industry is ideally positioned to gain from India's rapid urbanisation and robust economic expansion.

All things considered; the real estate industry is well-positioned to benefit from a number of trends. The government's emphasis on affordable housing and infrastructure development is also anticipated to support the sector's expansion. As a result, the real estate sector is expected to be one of the key drivers of India's economic growth in the coming years.

This article first appeared on PersonalFN here

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.

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