Last Updated on December 29, 2021 at 5:54 pm
Kotak International REIT FOF is an open-ended fund of fund scheme investing in units of SMAM ASIA REIT Sub Trust fund and/or other similar overseas REIT funds. The NFO period closes on Dec 21st 2020. In this review, we explain how a Real Estate Investment Trust (REIT) works and what kind of return one can expect from this fund of fund.
What is a REIT? Just as an equity mutual fund pools investor money together and buys stocks, a real estate investment trust pools money to buy/sell real estate. The resulting capital gains or rent shall be passed on to investors. Most of the rental income is usually passed on as dividends to holders.
How will Kotak International REIT FOF work? It will invest our money in an international RIET Fund like SMAM ASIA REIT Sub Trust fund (called underlying fund) This invest in properties across the Asia-Pacific excluding Japan. The dividend income and capital appreciation from these properties would be reinvested by Kotak into the underlying fund on our behalf.
What are the risks? The NAV will fluctuate according to real estate market demand and supply. If you buy a property to receive rental income, you would not be valuing the property daily. It is only at the time of sale, the market price would matter. Also as long as you receive rent regularly the playability risk is invisible (like credit risk in bonds). When you buy a RIET the property prices would fluctuate on a daily basis. There could be bull runs or bear runs like in a stock market. Economic conditions can impact returns. If a large chunk of properties need to be sold to meet redemptions, there is a chance that the fund manager may have to settle for a lower than market price (liquidity risk).
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Buying a RIET is not the same as letting out a portion of your house for rent. The volatility as we shall see below is comparable to the stock market.
Thes screenshot below is from the REITs latest factsheet (linked above). Notice both the volatility in the NAV and the huge dividend component.
Before we analyse this further, let us first compare the risk and reward of REITS with equity, bonds and gold.
REITs vs Equity vs Bonds vs Gold: Risk-reward comparison
We present the three, five and ten year annualized risk (standard deviation of monthly returns) and annualised returns (CAGR) of S&P Pacific REIT Total Returns in INR*, S& P 500 Total Returns in INR; S&P BSE Sensex Total Returns in INR, S&P BSE India 10-year Sov Bond Index in INR and Nippon Indian Gold BeEs ETF Price return in INR. Source: Factsheets from spglobal.com
* The RIET index comprises of the full Asia Pacific including Japan but we shall use it to appreciate associated risk/reward. The index returns in USD was converted into INR using the same scaling factor bet S&P 500 USD and INR. Therefore they are approximate.
In the three graphs below, scan the blue bars from left to right. They represent the annualised risk.
Notice that REIT volatility is comparable to that in the equity and gold markets. The returns can fluctuate. The adage “higher risk results in higher reward” is wrong as can be been from the above. There is no simple correlation between the two.
What return can I get from Kotak International REIT FOF? Investors should first expect a risk comparable to equity from this fund of fund. Just like one cannot expect returns from an equity fund – see: Do not expect returns from mutual fund SIPs! Do this instead! – one should not expect returns from this REIT of as well.
What return can I expect from Kotak International REIT FOF?
To determine this, let us study the rolling returns of SMAM ASIA REIT Sub Trust fund. The NAV of this fund could not be downloaded from the AMC site (in spite of Chrome’s excellent translation of Japanese). Therefore we used WebPlotDigitizer to get the time series approximately (red dots on the red line shown above)
This can be used to give an estimate of the kind of returns in USD (incl dividends) one can expect from this REIT over three and five years.
Notice that returns have swung from -4% to 14% (approx) over three-year windows and from 2% to 10% (approx) over five-year windows. An investor should appreciate this kind of risk before investing. The Indian real estate is entirely unregulated and returns are anecdotal and unsubstantiated. If you invest in a REIT, market risk is the price to pay. Also see: Real Estate Investing: Practical aspects retail investors should keep in mind
In summary, it makes little sense to invest in Kotak International REIT FOF. In any case, the exposure will be small compared to fixed income or equity components in our portfolio. Such small exposure to something so volatile is not worth it.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)