Reality Investments

Other than Primary Residence, if one makes investment in Real Estate it could take any form like Farm House, Commercial space given on rent etc.. to REITs and REMFs. The investments in reality sector with th eobjective of capital appreciation or income in the form of rentals is at the centre of this discussion. In India, about 17% of portfolio forms real estate among HNIs. 15-20% asset allocation is recommended by experts for real estate. Study conducted by Sneha(2009 Feb ) found out that the portfolio consisting of real estate add stability to the portfolio rate of return over the period 2004-2008.

Penthouses, villas, duplexes, luxury apartments, condominiums - India has all the facets of luxury housing on par with international standards. Besides luxury apartments, the integrated township concept has also been ushered in, in a big way in India. These integrated townships boast of luxury residences with features like golf course, tennis academy, shopping complexes, 5-star hotels, medi-city, university, commercial complexes and IT Park etc..

A study conducted by Association of Foreign Investors in Real Estate(AFIRE) found USA stacked up at first position, China second followed by India.


India has a shortage of 19.4 million housing units. During the 11th 5 year plan(2007-2012) 45 million housing units will be required. The demand from IT/ITES sectors have been a real push to the increased institutional investment in the reality sector along with demand from organised retailers during 2006. Another factor that contributed to the growth of the sector is the Govt's policy on Special Export Processing Zones(SEZ). At this stage the growth rate was 30%, $16 billion industry expected to touch $60 billion by 2010 by ASSOCHAM

'Currently less than 4 dwelling units per 1000 of population per annum get constructed in India. However the UN recommendation for developing countries is of 8 to 10 dwelling units per 1000 per annum in the next 20-30 years to arrest the detoriation of housing situation.Access to land at reasonable prices for housing is impossible. This has led to acute housing shortages. The Urban land ceiling and regulation act (ULCRA) of 1976 appears to have been wrongly implemented and is the main factor for the spiraling real estate prices.Land is not available to housing due to restrictions placed on conversion of agricultural land to non-agricultural land. The land prices in Bombay, Calcutta and Delhi are more than those in the western cities like London and Washington D.C. In fact, in the prevailing market rates for housing in Bombay, at Rs. 400 per square feet to Rs. 20,000 per square feet, 97% constitutes the cost of land and 3% the cost of construction.'

Due to overvaluation, Increasing Interest rates (early part of 2008), shakeouts happened in the capital markets coupled with global meltdown washed away major part of market capitalisation. The reality Index of BSE that stood at1317.89 in 2 January 2006 rose to to all time high of 13647.15 in 14 January 2008 and now stands at1519.37 (16 Feb 2009). Developers used to announce frsh projects after projects during the glorious days. ASSOCHAM study says it has fallen by 82%.

When prices of dwelling units skyrocketed, interest rate shot up affordability got a dip. Demand cannot grow faster in this phase.



Today what we have is PEs (Private equity funds) that are limited edition open to High Networth Individuals. Listed at London's Alternative investment Market(AIM), pan-european Exchange , Euronext or Singapore Exchange it attracts NRIs and foreign investors alike. Businessworld has estimated that by end 2007, $15 million PEs would have entered indian markets.


FDI flow of $2.7 billion accounted hardly 4.5% in 2003-04 to the reality sector. But this increased in 2004-05 to $3.7 billion contribution 10.6% to the realty. However in 2005-06 the FDI of $5.46 billion had 16% committed to this sector.

There is reality index of 14 stocks in BSE. How does one assess a reality compnay share?
Land bank can be one of the parameters. Another important parameter is the Management: How much disclosures does the compnay give. How many projects have been completed in time?

Have a look at Working Capital Ratio to Sales. Debt to Equity, Operating Margin and Return on Capital Employed. For a listed company also see the Price to Earnings ratio. The multiple will throw some light how the market is valuing that compnay.


Read the above ratios together with Price to squre foot ratio and Profit to square foot ratio to complete the picture.


The Income Tax sops available to individaul investor for repayment of interest and principal is a demand pull factor from the retail sector.

Income could be reduced uptoRs 1,50,000 towards interest on Housing Loan for purchase/Construction as per Sec 24(b) of IT Act in addition to the repayment of principal amount allowed under Sec 80C.



However, affordable housing needs lower cost of construction (steel, cement etc..). The Projects coming up in Tier-II, Tier-III cities will take off only if well connected with major cities. People should be able to go for work and commute back easily.

Related Posts:In the Reality....

Thematic Funds

Thematic Funds are defined as Funds that have portfolio cutting across multiple sectors. A Sectoral Fund necessarily need not be thematic fund, though it has a theme that is specific to the sector. In this aspect, a thematic fund is close to a diversified equity fund. But it differs from the diversified equity fund in its concetration to the theme that it follows. Wealth Builder funds, Contra funds, Lifestyle funds, FMCG Funds, MNC Funds, Technology Funds, ELSS Funds etc.. are all examples of thematic funds.


A theme is seasonal. We have seen Auto sector Funds and Power Sector funds redefine themselves in the past. when the sector suffers slow down, the theme losts its flavour. If we remove ELSS from the above list, all are seasonal themes at one or other point in time. tax Savings will continue to be an all weather theme in India.

Some of the themes like P/E and Dividend Yield are complimentary to each other; You can set your portfolio complete to get returns in all seasons irrespective of market's direction.
Another set of complementary themes consists of large cap, mid acp and small cap funds; When market pass through long term growth, stabilty or depression, you will be benefitting from the 'full diversification' . Todays small cap become tomorrow's mid cap and subsequently the large cap. When the market is depressed, your large cap will take care of you; When the stabilty is seen, both mid cap and large cap will take care of you; When in growth, you will benefit from the small cap. This need considerably large funds than P/E and D/Y combination for same objective of 'full diversification'

Still another theme that can be used with objective of 'full diversification' is using sectoral funds. But this approach will need even larger scale of funds than the above listed two approaches.

When funds proclaim asset allocation along these lines, it is important for investor to see if its risk-return space matches with that of his profile.

If you are a first time investor, thematic funds are not for you. It is best suited for the learned, knowledgable capital market players. A super affluent investor, or a class above that, can have thematic funds as they suffice in completing the diversification he needs. He may like to earn in all weather situations by amplyfying sufficient investment in all kind of sectors/themes that are available in the market. Even in theese cases more than 5-7% of deployment is not recommended by experts .


Finally one has to look at how skewed is the theme or how wide is the theme. For example an infrastructure fund if invests only in companies with facilities like port, airport, road projects, bridges; another infrastructure fund may define it to include basic industries like steel, cement etc.. a technology fund necessarily need not be IT Fund, it may be investing in companies that provide technology in the Media/Telecom/Pharmacuetical etc..


Recently there has been a thematic fund from IDFC that follows the GDP growth in the Indian Economy. It is different from the India theme funds of SBI One India Fund that restricts to 4 regions of India, LIC MF India Vision fund that envisages tactical investment only in large cap companies. Remember both are closed end schemes whereas the IDFC comes with an open ended variety.

Porters 5 Forces Analysis for IMFI

In the following section, the IMFI is viewed through the framework of Porter’s 5 forces wheel.

Strength of Competition:

To understand the competition from rest of investment opportunities, I have provided for a graph below:

As you can see, the most return is provided by equity among all asset classes during 1980-2006. So those who wants to build up corpus, needs to look at longer time frame, suitably plan and manage their investments. Leave it to the professionals to manage funds. Mutual Funds bring you Diversification of portfolio, Professional Management, Risk Reduction, Transaction Costs, Liquidity and Convenience & flexibility.



Who are the major players?

Reliance Mutual Fund 7020810 (16.67% )
HDFC Mutual Fund 4675745 (11.10% )
UTI Mutual Fund 4254817 (10.10% )
ICICI Prudential Mutual Fund 4190246 (9.95% )
Birla Sun Life Mutual Fund 3658075 (8.69% )
SBI Mutual Fund 2500367 (5.94% )
Franklin Templeton Mutual Fund 1941871 (4.61% )
Total for Industry 42111648 (100% )

Source:www.amfiindia.com

Competitive rivalry is not acute. Top 5 occupy 49.97% of AUM in 2007 and it has become 57.82% in 2008. The equity schemes offer more in management fees. Obviously the competitive rivalry to remain always number 1in AUM, to break-even or earn better profits always drives the players. The differentiating platform is the service & the technology to support such services. Having created the level playing field by bifurcating all Assured Return products out of UTI MF, by 2003 the stage is all set for the real match. By offering actively managed equity schemes with an institutional tilt, Reliance occupied the front seat in a short period. The industry continues to be tilted in favour of institutional funds in terms of AUM.

In order to remain competitive, MFs adjust on Entry load, Exit load, Contingent Differed Sales Charges(CDSC), Expenses ratio as in the case of Index Funds and Bond Funds; CDSC has become more fashionable than one time exit load. The abolition of entry load on direct applications and initial issue expenses on closed end schemes would require more innovative pricing from MFs.

Product differentiation has gone to the extent of making SIPs with a minimum of Rs 50.00 to Rs 100.00 in monthly installments both as a measure of inclusion as also a method of long term relationship building. Tied up with Self Help Groups for pension products(UTI MF, ICICI Prudential MF)/Employers for tax saving schemes(Reliance MF)MFs try to outwit each other.
New products like Gold ETF, Reality Sector oriented debt funds, New management Styles like Formula plans(Quant Funds) reveal the inner strength of the MFs. The year 2008 saw the unveiling of Equity Linked Derivatives as major part of portfolio in schemes led by ICICI Prudential Mutual Fund. Another feature of 2008 was the combination of Gold ETF and Equity in same portfolio from the UTI MF.

Type of schemes & collections

Please note the disappearance of Assured Return(AR) class from January 2005. OES has overtaken the CES over this period. But the pick up in CES is also noteworthy. The almost extinguished CES has really made a come back on the upsurge in capital market activities. The total AUM has been steadily growing over the years. In fact, as compared to previous period, the growth was over 63% in Jan 2007.


The growth in CES is also attributable to the growth in FMPs. When we look at the classification of schemes according to the objectives of the scheme like Income/growth/balanced etc.. the picture is even more interesting.

Although the Income group has been growing, the Growth group has outgrown in AUM. The growth in ELSS class is also visible due to the tax saving feature. The overall growth in the Liquid/MMMF segment is very attractive.

The share of growth schemes has increased by hardly 1%, income by 2% and the shift has come from gilt & liquid/MMMF sectors. After launching almost every conceivable type of equity and debt funds that the market here the market will allow, MFs are now going after niche markets to offer investors customised products. Commodity, Real Estate, Hedge Funds and Junk Bond Funds may be available in due course as already floating rate debt funds have established themselves. In fact we already have Asset Allocation Funds, Arbitrage Funds and Fund of Funds, ETFs and Gold ETFs. Adding frills like ATM debit card, accident insurance coverage etc.. have already become a way to give more value for money to the investor.

As on March 31, 2007 there are a total number of 2.99 crore investors accounts (it is likely that there may be more than one folio of an investor which might have been counted more than once and actual number of investors would be less) holding units of Rs. 328745.49 crore. Out of this total number of investors accounts, 2.88 crore are individual investors accounts, accounting for 96.45% of the total number of investors accounts and contribute Rs. 139210.91crore which is 42.35% of the total net assets.

Corporates and institutions that form only 1.67% of the total number of investors
accounts in the mutual funds industry, contribute a sizeable amount of Rs. 164175.43
crore which is 49.94% of the total net assets in the mutual funds industry.
The NRIs/OCBs and FIIs constitute a very small percentage of investors accounts (1.87%) and contribute Rs. 25359.15 crore (7.71%) of net assets.


The supremacy of OES over CES continued in 2007 and 2008 as well.

MFs are permitted to use F&O products only for hedging and portfolio rebalancing initially. So most of them benchmark themselves to debt market indices like CRISIL blended Index; Generate returns closer to one year T-bills. Since Sep 2006, 80% of the portfolio can be covered. This boosted the No. of Arbitrage Funds from 16 to 105 when 2008 unfolded. On the derivatives markets side, the 7 new products being ushered in by end Dec 2007. In the hay days of 2007, they produced least volatile rate of return in the range of 30% when diversified equity segment gave 40% plus maximum volatility. Already mini contracts worth Rs 1 lakh is implemented. This will boost performance and scope of arbitrage funds. Arbitrage

The Entry Barriers are not so strong. A Sponsor with a good track record capable of investing 40% networth of a minimum 10 crore networthed AMC can enter the trade by paying an application money Rs 1 lakh, Registration fees Rs 50 lakhs. Every OD filing will necessitate paying 0.03% of NFO collections with a minimum of Rs 1 lakh, the maximum being capped at Rs 1 crore and annual renewal fees Rs 50 lakh are what it takes to operate a MF. That leaves a neat 10 crores or 16 crores for your topline depending upon whether you are a no-load operator or not.!!!

OD filing fees has been revised w e f 01/04/2008 to 0.005% of collections; and the upper limit @ Rs 50 lakh. The registration fees also reduced to Rs 25 lakhs.The 6% Initial Issue expenses gets replaced with normal load w e f 01/02/2008. No load for direct applications w e f 04/02/2008. As the existing players are encouraged to bring in additional products, there is a raising of entry bar for new players after the change in leadership at SEBI.

2009 may see listing of AMCs;In 2008, UTI MF was planning IPO. Now that has come to stake sale consequent to market meltdown; it will force some amount of market discipline in the AMC’s management. 2008 saw 5 new fund houses getting into action including Bharati Axa and some distributor turned MFs


Exit barriers are also weak in the Indian MF industry just like the entry barriers. It may be by surrendering the certificate of registration as in the case of GE Mutual Fund (formerly known as SRF Mutual Fund) on the advice of SEBI because they have not launched any scheme and no funds were collected from the public.
The SEBI may cancel the certificate of registration of mutual funds and withdraw the approval granted to respective AMCs as in the case of GFC Mutual Fund and Asia Pacific Mutual Fund during 1999-2000. They also had not launched any schemes and no funds were collected from the public.

During 1999-2000 ITC Threadneedle Mutual Fund, Apple Mutual Fund and HB Mutual Fund migrated to Zurich India Mutual Fund, Birla Mutual Fund and Taurus Mutual Fund respectively. ITC Threadneedle Mutual Fund, Apple Mutual Fund and HB Mutual Fund surrendered their certificates of registration. In case of HB Mutual Fund and Taurus Mutual Fund, there was merger of their asset management companies and trustee companies 2
By now scheme migrations have become common. Partial/Full selling of stake also manifested by the industry showing the maturity acquired. By March 2008, Standard Chartered plc succeeded in selling the Indian AMC to Infrastructure Development finance company Ltd(IDFC) for USD 205 million in an all cash deal for AUM of USD3.25 billion with 22% in equities.

The strong and detailed regulation coupled with growing investor awareness and spread of computer literacy, the supplier power/buyer power is under check. But the weak link is the distribution that unites both suppliers and buyers.

Buyer Power

2009 opportunities for India unfold in infrastructural, banking and financial services sector. They are high – risk , high return equity schemes in the MF world. Now let us look where does Mutual funds stand in the Household Savings in India.
In fact bank deposits share has increased in the year ended March 2007.
Shares and Debentures consist of sub-classes like Private Corporate Business, Banking, Units of UTI, Bonds of Public Sector Undertakings and Mutual Funds. From 2005-06 both of the classes of Units of UTI and PSU Bonds have become redundant. Mutual Funds are a miniscule portion in the Shares and debenture category that increased from 3.6% to 4.8% as the aggregate class moved from 4.9% to 6.3%

The awareness has increased in the urban markets thanks to the Public Sector Mutual Funds like UTI, Canbank, etc.. and the Morgan Stanley Mutual Fund who taught the investors what to expect and what not to expect. The growth in the ICE sector has amplified the service facilities and normally service standards are maintained at reasonable levels. The regulation has stipulated minimum time for delivery of services and rights and duties of the investor.
However, the institutional investors are able to make MFs pay through their nose as evidenced in October 2008 liquidity crunch in the industry. Mainly invested into CDs and CPs, this class of liquid funds is less taxed among the debt funds. Banks were not prepared to extend assistance, although MF regulation permits MFs to borrow funds to tie over temporary liquidity problems. Eventually RBI created a special window for access for funds and SEBI moderated debt valuation norms.

Supplier Power

The mutual funds are in a commanding state w r t offerings of products and service levels achieved by them in the urban markets. The penetration to rural markets is low mostly due to absence of regulatory pressure like in the Insurance industry to serve that market. Funds like Bharati Axa have started 0 balance facility to woo customers from the rural area or are hesitant to start investing in Mutual funds. Compared to buyers, suppliers are in a demanding position as the recourse to investor is to abandon only. Increasing competition has brought in different variants in the debt market beyond Money Market Funds, Gilt Funds and Long Term Debt Funds. Notable feature is of FMPs, Interval funds, Liquid Funds and ELDs. ETFs have com eon indices and Commodity like gold. On the equity side we have arbitrage funds, international funds in addition to exhotic themes and sectoral funds.

Suppliers face threat from distribution as evidenced by Edelweis, Fortis, etc who were one time distributors now doning the manmtle of MFs. Erstwhile brokerage houses Motilal Oswal, India Infoline, Indiabulls also lining up their MFs. Another factor contributed to this, is the SEBI mandate of identified accounts for customers under Portfolio Management Services that used to be offered by them. When pooling restrictions were imposed, best way is to acknowledge true identity. They all have well developed geographical reach and internet based touch points with customers.

Today we have internet access with or without transaction capability via PC, Mobile phone, ATMs, Touch screens, branches of AMCs and Franchisees in the direct distribution process. IFAs, Banks, Brokers, Distribution Companies, Post Office, Supermarkets, Petrol Pumps all have joined the party. Over 60,000 ARMFAs are engaged as the IFAs. Cinema tickets to Singapore tickets dangles before the Mutual Fund Advisor when the rat race for AUM occurs. The survey conducted by ET-BCG for the period ending March 2007 brought to light that the distribution companies earned Rs 4000 croes as against the AMCs Rs 2100 to Rs 2500 crores as revenue. That is to say that 60% of the revenue in the MF market reached the distribution only.