Your Questions Answered: I want to invest in real estate. Please elaborate on the BSE Housing Index

Q. I am a fruit wholesaler in Azadpur Mandi. I am the third generation of my family trading in fruits in Delhi. Our family has traditionally invested in real estate in Delhi and has received good returns. However, in the recent past, there has been a stagnation in prices of real estate in Delhi. We now intend to diversify and invest in mutual funds investing in real estate companies. Can you suggest any index tracking the real estate sector? Please elaborate on the pros and cons of investing in such an index mutual fund.

Durgadas Ghanshyam Agarwal, Chandni Chowk, Delhi

The Bombay Stock Exchange (BSE) Housing Index serves as a critical measure of the performance of India's real estate sector, reflecting the health and trends of housing-related companies listed on the BSE. This index is particularly significant for investors and stakeholders who are looking to understand the dynamics of the housing market and make informed decisions.

The BSE Housing Index is composed of a basket of stocks from companies that are primarily involved in the housing industry. This includes developers, housing finance companies, and other related entities. The index provides a snapshot of the sector's performance by tracking the price movements of these constituent stocks.

Investment options

For those interested in investing in the real estate sector through the stock market, index funds based on the BSE Housing Index offer a viable option. These funds provide exposure to the housing market without the need to invest directly in real estate properties. The UTI and Kotak funds mentioned earlier are examples of such investment vehicles that aim to mirror the performance of the housing index.

The inclusion of a housing index fund in an investment portfolio can offer diversification benefits. Given the sector-specific focus, these funds can potentially counterbalance the performance of other assets during market fluctuations. However, investors should be aware of the risks involved, as the real estate market can be sensitive to economic changes, regulatory updates, and interest rate movements.

Top constituents of the BSE Housing Index

The BSE Housing Index is a barometer for India's real estate sector, reflecting the performance of major companies in the housing industry. In this detailed exploration, we delve into the top 10 constituents by weight:

Dixon Technologies: Dixon Technologies stands out as a key player in the consumer discretionary sector, specialising in manufacturing electronics. The company's innovative approach to technology and its strategic partnerships have positioned it as a significant contributor to the smart housing segment, where integrated electronic solutions are increasingly in demand.

Voltas Limited: A titan in the consumer discretionary domain, Voltas is renowned for its air conditioning and cooling solutions. The company's commitment to energy-efficient products aligns with the green building movement, making it a preferred choice for sustainable housing projects.

Asian Paints Limited: Asian Paints is not just about aesthetics; it's a brand that resonates with quality and durability. As India's largest paint company, it plays a pivotal role in both residential and commercial housing, offering a plethora of choices for interior and exterior spaces.

Grasim Industries Limited: Grasim Industries, a part of the Aditya Birla Group, is a diversified conglomerate with a strong presence in the commodities market. Its cement division underpins the construction industry, providing a foundation for housing development across the nation.

Godrej Properties Limited: Godrej Properties brings the Godrej Group's philosophy of innovation and excellence to the real estate industry. The company's focus on sustainability and customer-centric developments makes it a standout in the creation of modern living spaces.

Havells India Limited: Havells India is synonymous with electrical components and fittings. The company's extensive range of products is essential in powering homes and commercial buildings, ensuring safety and functionality in modern constructions.

The Phoenix Mills Limited: The Phoenix Mills has redefined retail and commercial spaces with its development of malls and entertainment complexes. Its foray into residential development is marked by a blend of luxury and strategic locations, catering to the upscale housing segment.

DLF Limited: DLF is a name that resonates with luxury and trust in the Indian real estate market. With decades of experience, the company has a significant impact on the housing sector, known for its high-end residential projects and townships.

UltraTech Cement Limited: As the largest manufacturer of grey cement and a leader in the ready-mix concrete segment, UltraTech Cement is the backbone of construction. Its products are fundamental to building homes that last for generations.

Ambuja Cements Limited: Ambuja Cements is a prominent cement company that emphasises on strength and durability. Its commitment to sustainable practices and innovative product lineup ensures that it remains a top choice for housing and infrastructure projects.

Performance and Returns

As of October 3, 2024, the BSE Housing Index has given a one-year total return of 47.11%. It has given a 5 year compounded annual return of 23.73%.

Note:Past performance is not an indication of future returns.

Pros and cons of investing in index mutual funds tracking BSE Housing Index

Investing in index mutual funds has become a popular choice for many investors, offering a passive investment strategy that aims to replicate the performance of a specific index.

Pros

Investing in index mutual funds that track the BSE Housing Index can be an attractive proposition for investors looking to tap into the real estate sector without the complexities of direct property investment. These funds offer a unique blend of exposure to the housing market with the benefits of index fund investing. Here are some compelling advantages:

• Diversification: Index mutual funds that track the BSE Housing Index provide investors with instant diversification within the housing sector. This mitigates the risk associated with individual stock investments and offers a broader exposure to the real estate market.
• Cost-Effectiveness: Typically, index funds have lower expense ratios compared to actively managed funds. This is because they are passively managed and aim to replicate the performance of the index, thus incurring lower management fees.
• Simplicity: For investors who prefer a hands-off approach, these funds are straightforward to understand and easy to invest in. They eliminate the need to analyse individual stocks and make complex investment decisions.
• Transparency: The holdings of an index fund are a reflection of the index it tracks, making it easy for investors to know exactly where their money is invested.
• Performance: Historically, index funds have often outperformed actively managed funds over the long term. While past performance is not indicative of future results, the trend suggests that index funds can be a wise choice for long-term investment.
• Accessibility: These funds lower the barrier to entry for investors interested in the housing sector, which might otherwise require significant capital.
• Liquidity: Unlike physical real estate investments, mutual funds offer higher liquidity, allowing investors to buy or sell their fund units more easily.

Cons

• Rate Sensitivity: The real estate sector, and by extension, funds tracking housing indices, can be sensitive to interest rate changes. Rising interest rates typically lead to increased borrowing costs, which can slow down the housing market and negatively affect the fund's performance.
• Liquidity Risk: Some stocks within the BSE Housing Index may have lower liquidity, which can impact the fund's ability to buy or sell these stocks without affecting their price. This can be particularly challenging during periods of market stress when liquidity is crucial.
• Economic Cycles: The housing sector is subject to long economic cycles. An index fund tracking this sector may perform well during a boom but can suffer prolonged periods of underperformance during busts. Investors need to be aware of these cycles and their potential impact on the fund's returns.

Taxation of investment made in mutual funds tracking BSE Housing Index

The Budget of 2024 has brought about significant changes in the taxation of mutual funds, particularly equity mutual funds such as the BSE Housing Index. Investors looking to understand the impact of these changes on their investments will find that the landscape has evolved, with both opportunities and considerations to be mindful of.

• Pre-Budget Taxation: Before delving into the changes, let's recap the pre-budget scenario. Long-term capital gains (LTCG) on equity mutual funds, which include index funds tracking stock indices like the BSE Housing Index, were taxed at 10% if the gains exceeded ₹1 lakh in a financial year. Short-term capital gains (STCG), on the other hand, were taxed at 15% if the units were sold within a year of purchase.
• Post-Budget Changes: The 2024 Budget has altered this taxation framework. Now, gains over ₹1.25 lakh are taxed at a rate of 12.5%. If the mutual fund units are sold within one year from the date of investment, the entire amount of gain is taxed at the rate of 20%. It's important to note that no tax is to be paid as long as the units are held.

The changes in taxation may influence the investment strategy for those investing in index funds. The scheme seeks to provide returns that, before expenses, correspond to the total return of the securities as represented by the underlying index, subject to tracking error. When selecting an index mutual fund post-budget, investors should consider the fund's performance, risk profile, and how the taxation changes might affect their returns.

Conclusion

The future of the BSE Housing Index largely depends on the overall economic environment, government policies, and the demand-supply dynamics in the real estate market. With urbanisation and the growing middle class in India, the housing sector is poised for growth, which could positively impact the index. In essence the BSE Housing Index is more than just a number; it's a reflection of the aspirations and growth of the Indian economy.

For investors, it represents an opportunity to participate in the real estate sector's potential while mitigating some of the risks associated with direct property investments. As with any investment, due diligence and a clear understanding of the market are essential before making any commitments.

Additionally, the investors in index mutual funds tracking the BSE Housing Index must adapt to the new taxation rules introduced in the Budget 2024. Understanding these changes is crucial for making informed decisions and optimising the potential tax liability on investments. As always, it's advisable to consult with a financial advisor to navigate these changes effectively.

Kuvera is a free direct mutual fund investing platform. Unless otherwise stated data sourced from BSE, NSE and kuvera.