Real estate mutual funds allow Indian investors to gain exposure to the real estate sector without owning physical property. This guide explains how real estate mutual funds work, their types, benefits, taxation, and how they compare with REITs to help you invest wisely.
Real estate has been a time-tested investment choice for many investors. It tends to hold value during uncertain times and has historically given a good return over a longer term. Yet, despite its appeal, many investors find it difficult to participate in this asset class due to high capital requirements and operational complexity.
However, in recent years, new investment avenues have emerged that lower these entry barriers and make real estate more accessible. One such option is called a real estate mutual fund.
This blog explains what real estate mutual funds are, how they work, the different types available, their taxation, and the key factors investors like you should consider before investing.
What is The Meaning of Real Estate Mutual Funds?
A real estate mutual fund is a sector fund that invests in companies that develop residential and commercial properties. If the underlying projects do well, the fund makes good returns, and vice versa.
A real estate mutual fund can invest in these companies directly or through Real Estate Investment Trusts (REITs). These funds further lower the entry barrier to this asset class, allowing you to participate without the need for large upfront capital. This makes it easier to diversify a portfolio by balancing both short and long-term investments.
To judge whether it fits your portfolio, it is important to understand how these funds operate on a day-to-day basis.
How do Real Estate Mutual Funds Work?
Real estate mutual funds operate much like any other sector-focused mutual fund. The process begins when investors like you pool their money into the fund by purchasing units at the prevailing Net Asset Value (NAV).
The fund manager then allocates this capital across a selected set of real estate–linked securities based on the fund’s investment objective. The fund manager actively monitors these allocations and adjusts them according to market conditions, sector cycles, and company performance.
A real estate mutual fund earns through both capital appreciation and income earned by the underlying investments. Gains and losses are reflected through the fund’s NAV, which moves as per the underlying portfolio.
What makes this real estate investment avenue attractive is its flexible entry and exit mechanism. You can enter or exit the fund at the prevailing NAV, subject to applicable exit loads and taxation.
While the structure remains the same, real estate mutual funds can follow different investment approaches depending on where they allocate their money.
Types of Real Estate Mutual Funds
Not all real estate mutual funds follow the same investment approach. Depending on where and how they deploy capital, these funds can be grouped into different categories, each carrying a distinct risk-return profile.
- Equity-oriented real estate funds
These funds invest primarily in listed real estate companies and developers. Their returns depend on property demand, project execution, and broader market sentiment.
- REIT-focused funds
These funds invest largely in REITs that own income-generating commercial properties. They offer a relatively stable income along with potential capital appreciation.
- Hybrid real estate funds
Hybrid real estate funds spread investments across real estate stocks, REITs, and debt instruments like bonds and debentures. This mix helps balance growth potential with lower volatility.
- Infrastructure and real estate funds
These funds invest in companies involved in real estate development as well as related infrastructure segments. Their performance is closely tied to urban development and government spending cycles.
- International real estate funds
These funds invest in overseas real estate markets through global REITs or property-focused companies. They allow investors to diversify beyond Indian real estate and reduce domestic market concentration.
Each type serves a different investment objective, which is why understanding their benefits becomes crucial before choosing one over the other.
Benefits of Investing in Real Estate Funds
The growing interest in real estate mutual funds is largely driven by the practical advantages they offer over direct property ownership.
- Low entry barrier
Real estate mutual funds allow you to invest in the real estate sector without needing large upfront capital. You can start with relatively small amounts and still gain sector exposure.
- Portfolio diversification
These funds help diversify your portfolio by adding real estate exposure alongside equities and debt. This reduces over-reliance on any single asset class.
- Professional fund management
Experienced fund managers actively track real estate trends, company performance, and market cycles. This removes the burden of individual stock or property selection.
- Higher liquidity compared to physical property
Unlike direct real estate investments, real estate mutual funds can be bought or sold at the prevailing NAV. This gives investors flexibility and easier access to their money.
- Access to income-generating assets
Through exposure to REITs and property-linked companies, these funds can offer regular income potential along with long-term capital appreciation.
These benefits make real estate mutual funds and REITs look similar. Since both investment instruments approach the same asset class differently, comparing them helps clarify which suits your goals better.
Real Estate Mutual Funds vs REITs
| Aspect | Real Estate Investment Trust (REIT) | Real Estate Mutual Fund (REMF) |
| Structure | Trusts/companies that directly own, operate, or finance income-generating properties like offices or malls | Mutual funds investing indirectly in stocks of real estate companies, REITs, or related securities |
| Liquidity | High; traded like stocks on exchanges during market hours | Moderate; redeemable via fund house at end-of-day NAV, less intraday flexibility |
| Income Distribution | Mandatory 90% of taxable income as dividends from rents/interest | Depends on fund performance; mix of dividends and capital gains, no fixed payout rule |
| Diversification | Across properties/locations but may concentrate in specific areas | Broader across real estate stocks/REITs, reducing single-asset risk |
| Minimum Investment | Allow investors to buy property exposure in units with ₹10,000 to ₹15,000 | Lower entry can invest via SIPs or small lumpsum with ₹500 |
Taxation on Real Estate Mutual Funds
The tax treatment of real estate mutual funds varies based on holding period, structure, and recent regulatory changes, making it an important consideration before investing.
Capital Gains Tax on Real Estate Mutual Funds
- Short-Term Capital Gains (STCG): If you sell mutual fund units within the short-term period (typically less than 36 months for non-equity funds), the gains are added to your income and taxed at your normal income tax slab rate.
- Long-Term Capital Gains (LTCG): When you hold real estate mutual fund units for the long term, gains are taxed at 12.5% without indexation benefit, as per current rules introduced after Budget 2024.
Capital Gains Tax on REITs/InvITs
- Listed REIT/InvIT units
Selling within the short term leads to STCG taxed at 20% on gains, and holding long term leads to LTCG taxed at 12.5% on gains above ₹1.25 lakh per year.
Key Points to Remember
- Exemption: For LTCG from listed units (like those most real estate funds hold), the first ₹1.25 lakh of gains in a financial year is tax-free under current provisions.
- Classification change: From 1 Jan 2026, SEBI reclassified MF investments in REITs as equity-related instruments, which may affect how gains are viewed in regulatory reporting (not tax law).
Once taxes are accounted for, the final decision comes down to how well real estate mutual funds fit into your long-term investment strategy.
Conclusion
Real estate investments tend to perform better in the long term than in the short term. This is why real estate mutual funds demand patience and alignment with your long-term goals. Before investing, you should assess whether the underlying fund’s strategy matches with your time horizon and risk tolerance.
When approached with a long-term mindset, real estate mutual funds can quietly strengthen a portfolio by adding a layer of stability alongside equities and debt, without the financial or operational commitments that come with owning property outright.
