If you invest in mutual funds, you must have often heard about NFO. When an AMC opens a mutual fund scheme to the general public for the first time, it does so through NFO. Just as a company is listed for the first time in the stock exchange during IPO, in the same way any new scheme in mutual fund is launched for the first time through NFO. You can also call it IPO of mutual fund. “What is NFO” Through this article, we will try to understand all the processes of NFO and how it is beneficial for us.

What is NFO?

NFO means: New Fund offer.

NFO is the process through which units of a mutual fund scheme are made available for purchase for the first time by an AMC (Asset management company). Whenever a mutual fund house starts a scheme for the first time, it is first opened for subscription to the general public through NFO. This subscription usually remains open for 10 to 15 days during which we can buy units of the mutual fund at its face price i.e. Rs 10. After the closure of the NFO, the money invested by the people in its subscription is invested in its asset class to build the portfolio of the fund. This asset class can be stocks, government securities or commodities. Depending on the performance of these assets, the NAV of the units of the mutual fund scheme increases or decreases and the higher the NAV increases, the better will be your returns.

Types of NFO

NFO can be mainly of 3 types:

Open Ended: Open ended funds are those which are always open for investment. In these you can invest and redeem money anytime. If NFO of an open ended scheme is launched, it is reopened for investment a few days after the subscription is closed.

Close Ended: You can invest in this type of fund only during the NFO period. Once the NFO is closed, no investment can be made in it. On maturity of these funds, the principal amount along with the return is credited to the customer’s account.

Interval Fund: Interval fund has the characteristics of both open ended and closed ended funds. These funds are opened for a fixed time interval during which investment and redemption can be made only in them. Apart from this time period, no transaction of any kind can be done in these funds.

How does NFO work?

During NFO, an AMC or fund house offers its new fund to investors for subscription for the first time. The following steps are involved from its launch to unit allotment.

NFO Face: AMC launches a new scheme and does its marketing and advertising. In this, it makes common people and big investors aware about its features, nature and objectives.

Subscription: Common investors can invest in these during the subscription period. During this phase, units of the mutual fund are offered at face value which is usually Rs 10. NFO subscription remains open for several days.

Minimum Investment: A minimum amount is set by the mutual fund house for investment in NFO. The investor has to invest equal to or more than this amount.

Allotment: After the end of the NFO tax period, units are allotted to the investors according to their investment. After allotment, the money received from subscription is invested in its theme asset class to build the fund’s portfolio.

Trading: After the subscription is over, the NFO opens for trading to the general public after a certain time period. Here investors can buy and sell mutual fund units anytime.

How to invest in NFO?

It is very easy to invest in NFO in India. For this you:

First of all choose the new fund offer in which you want to invest. want. Different AMCs in the market keep launching NFOs based on different themes. You can choose one according to your investment goal, risk and objective.

If you are already an investor in financial security then your KYC must be made, if you are investing in mutual funds for the first time then make your KYC first. You can make this by applying online or submit offline application to KRA.

After this you can submit NFO application through any mutual fund distributor, direct AMC or online platform. Along with the application, you also have to make payment for the applied unit.

Once the NFO application is submitted, wait for its allotment. Once the allotment is done, you are provided with the account statement and other account related things.

What things should be kept in mind in NFO investment

Investment goals: The reason or goal behind investing can be different for every investor. This goal depends on their age, income and risk. Therefore, before investing in any NFO, it is important to analyze things like nature, objective, theme and risk of the fund and keep in mind whether it is matching with the investment goal or not.

Fund House Performance: We invest in any investment tool with the hope that it will give us a good return and help in increasing our wealth. Therefore, whatever AMC you are going to invest in NFO, definitely find out the performance of its other funds and the capability of the fund manager.

Expense Ratio: Expense ratio means the charges that mutual fund houses charge from investors for the management of their funds. The higher their ratio, the greater will be the impact on investment returns. Therefore, before investing in NFO, keep its expense ratio also in mind.

Minimum Investment and Exit Load: Before investing in NFO, know what is the minimum investment limit in it. Exit load means the charges levied on taking redemption from the fund. Depending on the theme of the fund, these charges may or may not be non-applicable. Therefore, keep in mind that if you are investing for short term, then there should not be any or much exit load on it.

Comparison with old funds: There may already be funds available in the market matching the theme of NFO. You can improve your investment decision by comparing the new fund with the old one.

Offer Document: When an NFO is launched, AMC also publishes the offer document related to it. In this document, necessary analysis is given on the basis of theme, objective, asset class and market data etc. of NFO. By reading this offer document, you can gather all the necessary information about NFO.

Difference between NFO and IPO

When an AMC launches and offers a mutual fund scheme for subscription for the first time, it is called NFO. On the contrary, when a company lists its shares for the first time in the stock exchange for investing and trading by the common people, then it is called IPO. Which is called Initial public offer.

In NFO, units of mutual funds are bought and sold which are managed by the fund manager, whereas in IPO, company shares are bought and sold for tax reasons, the company aims to raise capital for its expansion and repayment of debts. It is possible.

The returns of NFO depend on the assets being invested in it and the ability of the fund manager, whereas the returns of IPO depend on the performance and valuation of the company.

Whenever AMC wants to launch a new mutual fund scheme, it can do so through NFO, whereas for a company, IPO is a one-time process through which it transforms from private to public.

Benefits of NFO

NFOs are usually launched on the basis of new themes and strategies. This brings a new investment opportunity for us.

In NFO, units of mutual funds are available for investment in face value which is usually Rs 10. In this way investors can buy mutual fund units in the initial phase with less money.

NFOs are launched keeping in mind the present situation and sentiment of the market. These often have the ability to perform better than the older funds running in the market.

Disadvantages of NFO

We can track old mutual funds on the basis of their past performance and historical factors which help us in taking right investment decisions but in the case of NFO, there is no past performance record of the fund due to which mistakes can be made in taking investment decisions. Might be possible.

Similar to the funds being launched in NFO, funds of other mutual fund houses may already be in the market, which are easy to analyze on the basis of historical data.

The future performance and success of NFO is not guaranteed which is not good for the returns to the investor.

Conclusion

Amc launches a new mutual fund scheme through NFO and this is a great opportunity for people to invest on a fresh theme and according to the ongoing market situation. During NFO, investors can buy units of mutual funds at face value which is usually Rs 10. Investing in NFO can give you good returns in the long term, but before investing in it, it is important to check the facts related to your objective, risk and capital.

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In the insurance world, different plans are available according to our every need. ULIP plan is a unique financial product offered by the insurance company which fulfills both our insurance and investment needs. Through our article, we will try to understand this plan and know its working.

What is ULIP plan?

ULIP stands for: Unit Linked Insurance Plan

ULIP is a plan offered by the insurance company in which we get the features of both investment and life insurance together. That is, if a person takes a ULIP policy, he not only gets life cover but also gets the benefit of good investment returns. Some part of the premium paid in ULIP plan is invested in your insurance cover and some part in different investment options like equity, debt, hybrid etc. Due to investment in equity and debt, the returns received in it are also higher as compared to other investment options. If the policyholder dies due to any reason, a lumpsum amount is paid to his nominee as death benefit.

How does ULIP plan work?

As mentioned earlier, in ULIP plan you get the qualities of both investment and insurance. Whenever you pay the premium of a ULIP plan, a part of it goes towards insurance coverage and the other part is invested in different funds selected according to your risk profile. This fund can be equity fund, debt fund, hybrid fund or index fund. In exchange for the investments made in these funds, you are allotted units whose NAV is calculated on a daily basis and your investment returns depend on the NAV. The premium paid towards the insurance cover provides you life coverage in which if the insured person dies, the death benefit is given to the nominee. Many charges can be taken from you in ULIP plan, which may include fees for fund management, administration charges etc. Almost all ULIP plans come with a lock in period which is 5 years. You cannot withdraw any money during this lock period. After 5 years, partial withdrawal can be taken from ULIP plan as per your need. If you wish, you can change the fund being invested during the tenure of the policy or increase or decrease the sum assured amount.

Types of ULIP plans

We can divide ULIP plan into different parts on three basis. The first is based on the investment in funds made by ULIP plans, the second is based on their returns and premiums and the third is based on the death benefit received.

On the basis of investment

ULIP plans invest in different asset classes or funds to generate good returns. These funds include:

Equity: In this type of plan, a part of the premium is invested in equity fund i.e. a mutual fund scheme that invests in the stocks of private companies. Such funds involve high risk and high returns. People who want higher returns on their investment can choose this asset class.

Debt: Debt are funds that invest in fixed income instruments like government bonds, securities, debentures etc. where fixed returns are guaranteed after a time period. The risk in these funds is less but at the same time the returns are also less as compared to equity.

Balanced: As the name suggests, such funds include a combination of both equity and debt. Due to investment in the balance amount, both its risk and return are reduced. We can say that these funds are less risky than equity funds but give higher returns than debt funds.
Based on returns and premium

The following plans come under this category:

Single Premium ULIP Plan: In such plans, the premium is paid in one go only at the time of purchasing the policy.

Regular Premium ULIP Plan: In such plans, premium can be paid regularly like monthly, quarterly, half yearly or annually. This premium may have to be paid from the inception of the policy till its maturity.

Guaranteed ULIP Plan: The returns received in such ULIP plans are guaranteed. Under this plan, most of the investments are made in less risky i.e. debt funds. If you are investing for a specific goal then this plan may be right for you.

Non-Guaranteed ULIP Plan: In non-guaranteed ULIP plans, investments are made in instruments like equity funds to maximize returns. Due to investment in equity, the returns here can be higher but it is also equally risky and volatile.

Life Stage ULIP Plan: In this type of ULIP plan, the investment goes according to the age of the insured. It is often seen that a person’s ability to take risk decreases with age. In his youth, he is able to earn well and work, hence he is able to take more risks, whereas as his age increases, safe and less risky options of investment are suitable for him because at this stage of age, everyone needs a stable income. . This ULIP plan works on this principle. As long as the age of the insured person is young, this plan invests more in equity funds and as his age increases, the proportion of investment is reduced from equity to more in debt. It works to balance the risk and return of investment.

On the basis of death benefit

Type 1: Under this plan, the nominee gets either the sum assured or the fund value as death benefit. In such a case, whichever option has the higher value is paid.

Type 2: In Type 2 plan, both fund value and sum assured are paid to the nominee. In this, the value of sum assured remains higher but at the same time the amount of premium to be paid also increases.

Locking period in ULIP plan

ULIP plans have a mandatory lock-in period of 5 years. Any partial withdrawal can be taken only after 5 years and that too is subject to minimum and maximum limits depending on the policy. Here it is also important to keep in mind that to withdraw any amount, you must have paid all the premiums for the last 5 years and you can withdraw only about 20% of the policy value in a financial year.

Benefits of ULIP plan

Market Linked Returns: Unlike other life insurance plans that offer a fixed return that often does not beat inflation, ULIP returns are market linked and are generated by investing mostly in equity and debt funds. This return can be much higher than other investment tools.

Insurance Coverage: Along with investment, ULIP plans also provide insurance coverage. On the death of the insured person, a lump sum amount is paid to the nominee.

Tax Benefit: Tax benefit can be availed on the premium paid and returns received in ULIP plan under the Income Tax Act.

Flexibility: The investor has the option to choose the investment option as per the risk. Keeping in mind his returns, he can choose what portion to invest in equity and debt.

Helpful in creating wealth: Since ULIP plans offer a good return compared to other plans, we get the benefits of both wealth creation and insurance coverage in the long term.
Disadvantages of ULIP plan – Disadvantages of ULIP plan

Charges: On taking ULIP plan, you may have to pay many types of charges. These may include charges like fund management charges, administration fees, mortality etc. which reduce the total returns of the fund.

Market Risk: To generate good returns in ULIP plans, investments are made in market related instruments and funds. Along with giving higher returns, they also involve more risk.

Lock in period: There is a lock in period of about 5 years in ULIP plan, only after which partial money can be withdrawn. This can cause problems for investors who need money in the short term.

Complex: Understanding the insurance and investment part of a ULIP plan can be quite complex for investors. They may have difficulty understanding the many terms and investment components involved.

Not suitable for everyone: Such plans are not suitable for those people who have good knowledge of the financial market and can manage their investments themselves. Such people can just take a pure life insurance policy and manage the investment themselves and generate good returns.

Difference between ULIP and traditional plan

Conclusion

ULIP is a plan that gives us the benefits of both insurance coverage and investment. While in other insurance plans the returns are fixed or low, in ULIP plans the returns are generated by investing in market linked equity, debt and balance funds etc., hence it is better in many ways. While ULIP plan has its own advantages, it also has some disadvantages such as investment and administrative charges associated with it, lock in period and market risk. If you are also thinking of taking a ULIP plan, then keep all these facts in mind and take any decision only after comparing it with other insurance and investment options.

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IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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Mutual funds are a very good tool to get a good return by investment. Apart from giving you equity market returns, it also helps in diversifying your portfolio. We can adopt many methods to get maximum benefit from mutual fund returns. One such method is STP which not only increases the returns of your mutual fund but also reduces your risk. Through today’s article “Mutual fund STP kya hai”, we will completely understand the working of STP and also know the difference between it and SIP.

Full form of STP is: Systematic Transfer Plan

Mutual fund STP is a facility in which a fixed or flexible amount decided by the investor is transferred from one mutual fund scheme to another at a given time. Under this, the investor’s money can be transferred from one mutual fund scheme of the same AMC to another scheme and for this the investor does not have to apply again and again. Similar to SIP, the instruction is given to the AMC by the investor in one go, after which the installment of STP starts transferring from one scheme to another automatically. STP provides two main benefits to the investor, one is that your money gets invested systematically in every market situation and secondly, you get the benefit of market linked returns even on your lump sum money.

How many types of STP are there?

STP is mainly divided into three parts:

Fixed STP: As the name suggests, in this type of STP a fixed amount is transferred from one scheme to another after a fixed time period. This amount is determined by the investor and remains the same throughout the tenure of the STP.

Flexible STP: In this type of STP, how much fund to transfer and when to transfer is decided by the investor as per the market conditions. According to the ongoing situation of the stock market, the investor can decide to transfer more or less amount.

Capital Gain STP: In this type of STP, only the return or capital gain on the investment in the investor’s source scheme is transferred to the other scheme.

How does STP work?

To invest through STP, you have to decide three things. The first is the source scheme in which you invest lump sum money. The second is the target scheme in which the installments of STP are transferred in a fixed time and the third is the amount that you have to transfer under STP which can be a fixed or flexible amount.

For source scheme, you should choose a fund in debt category which has low risk and volatility and does not have to pay any exit load on withdrawal of money. Exit load is taken into account because in STP, units from one scheme are redeemed and units of another scheme are purchased with the same money.

The investor then decides the amount he wants to invest in the debt scheme at one go. After investing in a debt scheme, a request is given to the AMC to transfer the scheme to the target through STP installments, after which the money starts getting transferred systematically. You can use online platforms like groww, etmoney etc. to compare and invest in mutual fund schemes of different AMCs.

Benefits of STP

Cost Averaging: By investing through STP, the investor gets the benefit of rupee cost averaging. That is, mutual fund units are bought when their average price is low but at the time of selling, when their market price is high, you get good returns.

Higher Returns: STP helps you earn higher returns on your investment. In this, your money is transferred from a less risky scheme to a scheme in which the possibility of returns is higher. If the investment is held for a long time, the returns on it also increase manifold.

Portfolio Balancing: In STP investment mode, your portfolio has a mix of both debt and equity, which is why it helps in maintaining the balance of both risk and return of your portfolio.

Things to keep in mind when investing through STP

Investment through STP is done with the aim of keeping your risk low and returns high, but it is also important to keep in mind that it is not suitable for all people. You should know your objective before investing through this. The points given below will help you understand this.

Invest through STP only if you want to remain invested in it for the long term. It takes time to transfer the lump sum money invested in one scheme to another scheme and to earn a good return from the other scheme, it is necessary to stay invested in it for at least 3 to 5 years.

Choose the source scheme of STP wisely. Generally, short term or liquid funds are chosen for this, which have less volatility and risk and no exit load has to be paid for withdrawing money in short term.

When investing through STP, also keep in mind the applicable taxation. Since in STP, money is redeemed from one scheme and transferred to another, tax may be applicable depending on the long or short term capital gain arising from it.

While investing through STP, it is very important to keep in mind the ongoing market situation. Even if you do not have complete information about this subject, then definitely consult your financial advisor once.

SEBI has prescribed minimum 6 installments of STP from one scheme to another. Keep this thing in mind before investing.

What is the difference between SIP and STP?

Conclusion

There are many strategies and plans available to get good returns in mutual funds, among which STP has its own place. However, before investing through this, it is very important to pay attention to our long term objective and risk profile because this plan is not suitable for everyone.

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IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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This is a closed ended debt mutual fund, in which we can invest for a fixed time period. Under FMP, investors invest a fixed amount and it is returned on maturity after a fixed time period. This investment plan is usually for 1 to 3 years and the indicative return can be 7% or more.

FMP is one of the low-risk investment options in which you can invest only during its subscription period i.e. NFO. This is a fixed interval, closed ended scheme which you can also consider as an alternative to FD. By investing in this, you can balance your portfolio and if a 3-year scheme is chosen, you can also take the benefit of indexation in long term capital gains.

Features of FMP

Closed Ended Scheme: FMPs are closed ended schemes, that is, investments can be made in them only when an AMC opens them for subscription for the first time through NFO. Once the subscription is over, they cannot be invested in and they remain locked in till their maturity.

Lock in period: As already mentioned, there is a lock in period in FMP. It is issued for a fixed time period such as 1 year, 3 years or 5 years. During this period, no investment or redemption can be made in them and on the arrival of maturity date, the entire money of the investor is returned to his bank account along with the return.

Investment Asset: FMP falls in the category of debt schemes, that is, to generate income, the fund manager invests in debt instruments like government and corporate bonds, commercial paper, treasury bills and debentures, etc., whose maturity time is also the maturity of the scheme. Is equal to time. For this reason, the returns received from them are less than equity mutual funds but stable.

Low Risk: FMPs are a low risky investment option due to investment in the debt market and stable returns. The indicative returns that can be earned on these are disclosed at the time of NFO or subscription itself.
How does FMP work?

Investment Period: Before investing in FMP, you should know for how long you have to invest. In FMP, you have to choose the scheme for a fixed time period, like 1 year, 3 years, or 5 years. During this time, your money remains invested and no withdrawal can be taken from it. Therefore, invest only that money in FMP which you do not need in the short term.

Portfolio Structure: Once your money is invested in the FMP, it is invested by the fund manager in debt instruments such as government bonds, corporate bonds, and other fixed income securities keeping in mind their ratings and risk. These instruments operate on fixed interest rates, which is why the returns in FMP come with less risk and are stable compared to other investment options.

Lock in period: There is a lock in period in FMP, that is, you cannot withdraw your invested money during the lock in period. This keeps your money fixed and less affected by market fluctuations.

Returns: The AMC informs the investor when the maturity date of the FMP arrives. On maturity, the investor’s money is credited to his registered bank account along with the returns.

How to invest in FMP?

Like investing in any mutual fund, investing in FMP can be done. Here it has to be kept in mind that since FMP is a closed ended fund, investment can be made only when it is opened for subscription. Any scheme is opened for subscription for the first time during NFO i.e. New Fund Offer.

Almost every AMC comes up with new funds from time to time in which units of the fund are offered for purchase at its face value, which is usually Rs 10. FMP is also opened for investment by common people through this, where any investor can invest in it through online or offline medium.

To invest online in FMP, you can take the help of any online broker, registrar or AMC’s own website. Some of these are groww, etmoney, mycams etc. Your KYC must be done before investing in any mutual fund scheme. Even if your KYC is not made, you can apply for eKYC on these platforms or fill the offline KYC form and submit it.

After completion of all these processes, you can easily apply for NFO of FMP. After which after about 5 days you are allotted mutual fund units.

Who should invest in FMP?

FMP is a low risk debt mutual fund. The value of investments made in these increases or decreases according to daily changes in NAV. FMP can generally be a good option for those who can bear some risk and want better returns than FD.

If your investment horizon is not short term, that is, if you are going to need the money after 1 or 3 years, then you can still invest in FMP. But here it is also important to keep in mind that due to being locked in, you can get your money back only on maturity.

Benefits of FMP

Stable Returns: Investment in FMP is made for a fixed time period, the indicative returns of which are already known to you. Therefore, it is very beneficial for those people who want to invest in a fixed return instrument in a short period of time with low risk. Apart from this, during the downfall of equity market, these instruments can be a great means to protect your capital and generate a good return.

Low expense ratio: FMP has a lower expense ratio than other mutual fund plans. Expense amount means the charge that a mutual fund house charges from the investor in return for managing the scheme. Its reduction also increases the returns you get.

Risk Management: FMPs are managed by professional fund managers whose main objective is to generate good returns by investing in fixed income instruments. Because they invest only in the securities of good and stable private and government companies, hence the risk involved in investment is reduced to a great extent.

Better returns than FD: The returns in FMP are better than any other fixed income instrument like bank FD, RD, PPF etc.

Low Risk: The risk involved in FMP is much lower than equity mutual funds, so it can be a great option for investors looking for better returns with less risk.

Disadvantages of FMP

Liquidity and Lock-in: FMPs have a lock-in period, which requires you to keep your money invested for a fixed period of time. If you need money in emergency, you have to wait. Although FMP is traded in the secondary market i.e. stock exchange after allotment, it is not easily encashed due to lack of flexibility and liquidity.

Interest Rate Risk: FMP involves interest rate risk. The money you invest in FMP generates returns through fixed income instruments, which are influenced by market and economic conditions. If interest rates increase in the market, your returns may reduce.

Credit Risk: In FMP your money is invested in corporate bonds, government securities, or other debt instruments. If a company defaults or their financial condition worsens, your money may also be at risk.

Conclusion

Investment in FMP helps to diversify and balance your portfolio. It gives you a good stable return with low risk, which many people need. But before investing in it, it is important to keep some things in mind, like what is your investment goal, or if you are going to need money in short term, then instead of putting it in a lock-in instrument, you can invest in a liquid fund. Can.

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IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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Absolute return is a simple concept that tells you the total profit and loss on your investment without taking into account any time factor. In simple words, it tells you the total return you got in your investment. It does not take into account the time period for which the investment has been made, or the benchmark against which it is compared. It helps in telling the total returns from the beginning of investment in mutual fund or any other instrument till its present time.

How does absolute return work?

Absolute return is one of the easiest and most accurate ways to calculate your investment’s performance and the returns it provides. Using this, we are able to know how much return we have received from our investment time period to the present value of the investment.

Through this return, fund managers and investors can estimate how effective their investment strategy is, and whether they should work further according to this strategy or not. Unlike other returns, profits and losses here are not compared to any benchmark, nor does it matter what the market condition has been during this period. Overall, it shows the difference between the time period of your investment and its initial value in percentage format, so that we can make a correct opinion about our investment.

When is absolute return used?

Every investor, whether long term or short term, wants to know the risks and rewards involved in the investment he makes. This type of investment is usually done in market linked instruments like mutual funds, stock portfolio etc. Using absolute returns, investors can track the returns generated by investment instruments such as mutual funds over a given period of time. A good return confirms that the invested scheme has performed well in the past, and similar performance is expected in the future. All these factors help an investor in taking long term investment decisions, and choosing a good investment instrument.

Importance of Absolute Return

Simple Calculation: Calculating Absolute Return is very easy. Any common citizen or investor can easily understand this. For investors who do not have much knowledge of market ratios and financial formulas, this is a great way to know the performance of their investments.

Portfolio Diversification: Absolute return refers to the simple return of an investment without any fundamental or benchmark factors. Keeping this in mind, the investor can check his various investment returns and take appropriate steps to diversify the portfolio.

Short Term and Long Term Goals: Absolute Return calculates returns without taking the time factor into account. In this way, it can be beneficial for both long term and short term investors. This helps them in taking future decisions related to their investment by looking at its current value.

Effect of market volatility: Market volatility is not taken into account in the calculation of absolute returns. It only works to show positive or negative returns while making the investment returns stable. Thus, it is beneficial for those investors who do not have much knowledge of various market factors and consider total returns as the benchmark for their investment decisions.

How to calculate absolute return?

Absolute returns can be calculated very easily. For this, the principal value of the investment is subtracted from the current value of the investment, after which the value obtained after dividing it by the current value is the absolute value. For example, you invested Rs 1 lakh in a mutual fund on January 1, 2023, the value of which has increased to Rs 1 lakh 30 thousand in December 2024. Your total profit in this case was Rs 30 thousand. By converting this into percentage, we can find out the absolute value, for which the formula given below is used.

Absolute return’s formula

Absolute Value = ((Current price – Purchase price) / Purchase price) * 100

Using the example values above:

Absolute Value : ((130,000-100,000)/100,000)*100 = 30%

Difference between absolute and annual return

Conclusion

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IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

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In today’s time of demand, it is very difficult for people to save money for investment, and if you want to invest in real estate i.e. any property, then you will be shocked to hear the price of land. In such a situation, REIT is a way which gives you the advantage of taking advantage of the returns given by real estate even without buying it for a minimum amount of money. The concept of REIT is not so popular in India yet and many people are not even aware of it. In such a situation, in today’s article we will cover “What is REIT” and the questions related to it.

What is a REIT?

REIT means “Real Estate Investment Trust”. This is a means of investment in which profits are earned by investing in real estate related mediums. It was first started in India in 2007, through which investors are able to invest in any property without buying it. Like the stock market, REIT is also regulated by SEBI. In this, returns are mainly earned by investing or renting commercial properties like offices, shopping malls, hotels.

If you are also among those people who want to invest in such an option which provides regular income along with diversifying your portfolio, then REIT can be a good option for you. But here it is also important to keep in mind that like every investment option, REIT also has its own risks and risks, and it is very important to have complete information and research before investing in them.

How do REITs work?

From the setup of REIT till the common people invest in it, the following steps are followed:

The functioning and structure of REIT is similar to that of mutual fund. The concept of REIT is quite new in India, the first guideline of which was issued by SEBI in 2007. The current guidelines are as per the approval of 2014. The entity that wants to start a REIT must be established as a company or corporation whose main business should be in real estate. It includes sponsor, fund manager and trustee. To establish a REIT, first a real estate company appoints a trustee acting as a sponsor. This trustee controls all real estate assets. The trustee appoints a manager who invests and manages real estate properties on behalf of the trustee. After this, REIT can apply to be registered as per its asset class. People can invest in it after it is registered or listed in the stock exchange. To start a REIT:

• The total asset value of the company should be at least Rs 500 crore.
• 90% of its taxable income has to be distributed among investors in the form of dividend.
• 80% investment should be in income yielding properties.
• 20% can be invested in other assets like stocks, bonds etc.
• Only up to 10% of these investments can be made in under construction projects.

There are mainly three REITs in India at present:

1. Brookfield India Real Estate Trust
2. Embassy Office Parks REIT
3. Mindspace Business Parks REIT

How many types of REITs are there?

According to the type of investment, REIT is mainly divided into 6 parts:

Equity REITs – This is the most popular type of REIT. In this, maximum investment is made in properties and real estate from where income is earned in the form of rent.

Mortgage REITs: Like Equity REITs, these REITs also invest in real estate, the only difference is that their income comes in the form of EMI and interest on the properties sold instead of rent.

Hybrid REITs: Their income includes both rental and interest profits.

Private REITs: A limited number of investors are involved in these and they work like private placement. It is neither registered under SEBI nor listed in any stock exchange.

Publicly Traded REITs – As the name suggests, they are registered by SEBI and listed in the stock exchange. Like stocks, people can buy and sell their shares from the exchange.

Public but not listed REITs: Such trusts are registered with SEBI but are not listed on the stock exchange. These are less traded than listed REITs and also have less volatility.

How to invest in REIT?

Investment in REIT can be done in the following ways:

During IPO: Like the stock market, one can list and raise funds in REIT through IPO and FPO. During IPO, investors can invest in REIT for which the same steps are followed to participate in the IPO of any company. Before 2021, the minimum investment amount in REIT was Rs 50,000 but later SEBI issued a circular and increased it from Rs 10,000 to Rs 15,000. Apart from this, the minimum purchase limit was also reduced from 100 to 1 unit.

Through Stock Exchange: As already mentioned, after IPO, REITs get listed in the stock exchange and trade like any common stock. From here also investors can easily buy units of REIT.

Through Mutual Fund: Apart from the two methods mentioned above, investors can also invest in REIT through mutual funds. At present, very few mutual fund houses offer this service which is likely to increase in the future.
What is the return on REIT investment? – How much return is received in investment?

The returns received in REIT depend on many factors such as performance of the properties invested, interest on EMI, property rent etc. At present the average yield of listed REITs in India is between 6-8% but this is not fixed in any way. It is also important to note here that it also depends on the economy and investor sentiment.

Benefits of investing in REIT

Diversification: Through REITs we can diversify our investment portfolio. This is a different type of investment instrument which earns profits by investing in many types of properties including office buildings, shopping malls, apartments and warehouses etc.

Stable Income: REITs usually give stable and regular income to their investors in the form of dividends. This income supports investors financially in the form of a regular cash flow.

Liquidity: As already mentioned, REITs are listed on the stock exchange. Being listed on the exchange, it is seen as a liquid investment option through which investors can easily buy and sell REIT units without any hassle.

Professional Management: REITs are managed by professional fund managers who are experts in their field. Due to their efficiency, REIT has the ability to give a good return compared to other investment instruments.

Tax Benefits – Rental income from REITs and interest etc. which is due to investment in property, is tax free.

Low Investment Requirement: Before 2014, investment in REITs could be done with a minimum of Rs 50,000. But later this limit was changed to between Rs 5000 and Rs 15000. In this way any common citizen can invest in real estate in a very small amount.

Disadvantages of investing in REIT

Like every investment vehicle, investing in REITs has some disadvantages. The losses incurred by investing in REITs are explained below.

Market risk: Like any other investment, REIT is also not free from market risk. The value of your investment varies depending on the performance of the rail estate market.

Interest rate risk: The returns of REITs can be affected by changes in the ongoing loan and investment interest in the economy. If interest rates rise, it may become expensive to buy REIT units, which reduces the income of the properties in which the REIT fund has invested.

Inflation risk: Inflation means inflation. Due to this the value of returns given by REIT reduces. If the rental income received does not match the rate of inflation, then people may turn to other means of investment.

Management risk: The funds of REITs are managed by a team of professionals. The fund manager takes all the decisions related to investing the fund. If this management takes any wrong decision and it affects the returns of the REIT.

Limited control: When we invest in REIT, we do not have any control over the asset being invested. All this is controlled by the fund manager and we also have to depend only on the management.

Conclusion

In short we can say that REITs are trusts like mutual funds which earn returns through real estate instead of investing in stocks and other assets. It gives an opportunity to the common man who is unable to invest in any property due to low income, to avail the profits from real estate. If we look at it, from diversifying your portfolio to getting regular income, REIT is a great means of investment.

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