The Securities and Exchange Board of India (SEBI), vide its press release dated June 26, had announced that it had approved the guidelines for real estate mutual funds (REMFs) wanting to set up shop in India. But, curiously, more than a fortnight after this announcement, the guidelines do not find a place in the list of operative guidelines issued by SEBI thus far and put on its Web site. May be, it is still looking at the nitty-gritty of the issue.

From the press release, the contours of the regime regulating REMFs are visible that they would be close-ended funds to start with, that the units would be traded in the bourses like the units of all close-ended funds and that they would be allowed to invest in four avenues, namely, (a) real-estate, (b) mortgage-backed securities, (c) shares and debentures of listed and unlisted real-estate companies, and (d) other securities.

One feels slightly uneasy about (b) and (d) given the raison d'etre of REMFs to obviate the need for buying or constructing the second and subsequent houses. In other words, if a person wants to invest in real estate he need not go through the hard grind of finding a property, finding financiers therefor, getting it registered and nursing it till propitious time comes for its disposal. Instead, he can subscribe to the units of an REMF, which will happily suffer this drudgery. Moreover, an uninitiated investor can burn his fingers badly in the rough and tumble of the real-estate market.

An REMF, armed as it is with research capabilities, can easily side step the minefields. Given this objective, why should it be allowed to invest in mortgage-backed securities, which would only fetch measly interest. One hopes the liberty in mortgage-backed securities would be restricted to a small percentage and that, too, as a stopgap arrangement when opportunities to invest in real estate have perhaps dried up.

One also hopes that too much is not allowed to be invested in other securities, lest REMFs lose focus and stray into non-niche areas. Investors in real-estate are normally in for a long haul. It would be futile to expect phenomenal returns in, say, a year's time.

Therefore, the tenure of a scheme should be at least ten years if not more. Those itching to get out earlier will have to exit through the bourses. In the case of close-ended funds, experience shows that the market quotations are invariably at a discount to NAV. Ordaining close-ended funds to publish NAVs daily like open-ended funds is perhaps to facilitate price discovery in the market. But how will an REMF find out the NAV on a day-to-day basis?

Unlike for shares the underlying assets of share market funds there won't be any authentic published quotation for property, the underlying asset of REMFs.

It is hoped SEBI would bestow the attention this critical aspect deserves. The mutual fund industry would obviously want units in REMFs to make the grade as long-term capital asset if they are held for more than twelve months on a par with units of other hues. But considering the unique features of investment in real estate, a minimum period of 36 months should be insisted upon. Remember 36 months is the norm and 12 months is the huge exception made in favour of the share market with a view to wooing investment therein.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)