Two Asset Classes for Portfolio Diversification

August edition of Points to Ponder sought to explain how variety could be mistaken for diversity and that effective diversification would have to ensure that constituent asset classes of an investment portfolio do not all move in the same direction in all situations. There are, of course, considerations of investor’s risk profile and his goals with their time horizon for achievement and the optimum proportion of various asset classes in the portfolio. But even before tackling the complicated issue of constructing a model portfolio based on the above considerations, it may be worthwhile to explore some of the emerging opportunities to invest in asset classes which were hitherto not easily available for investment by average retail investor in India. Two such asset classes are discussed below:

1. REIT (Real Estate Investment Trust) pools capital from large number of investors (as in the case of Mutual Funds). Professional managers then use these funds to buy large scale income generating real estate assets. SEBI has mandated that a REIT must distribute 90% of its Net Distributable Cash Flow (NDCF) to unit holders and such distribution has to be done at least once in six months each financial year.
   
   In India REIT is still a nascent asset class though growing steadily. There are six listed REITs; Embassy Office Parks, Mindspace Business Parks, Brookfield India, Nexus Select, Knowledge Realty Trust and Bagmane Prime Office REIT. The trusts together manage more than 214 million sq ft of grade A office and retail space, with gross AUM of over Rs 3.17 lac cores as of Q1 FY 27. More heartening is the fact is the growth in distribution of NDCF by all the listed REITs which on a cumulative basis, since inception of these REITs, has crossed Rs 34800 crores. And the growth potential is immense. In the US for instance, more than $ 4.5 trillion worth of commercial real estate assets are owned by US REITs of all types. To put this figure in perspective, it, more or less corresponds to the market capitalization of the entire universe of listed companies of India
   
   SEBI has sought to bring REITs within the reach of a larger pool of investors by reducing the minimum application amount from Rs 50000 to Rs 10000 to 15000 and the trading lot size from 200 units to just one. It also permitted the launch of small and medium REITs. So, a retail investor today, can start building up exposure to real estate with just Rs 10 to 15 thousand.
   
   SEBI has also proposed allowing REITs to invest in under-construction and third-party projects without a controlling interest to expand revenue streams.
   
   But one of the most significant initiatives was SEBI’s reclassification of REITs as equity-related instruments from January 2026, followed by their inclusion in broader equity indices in July. These measures are expected to attract substantial passive inflows from Mutual Funds.
   
   The RBI, meanwhile, allowed commercial banks to lend directly to REITs and Infrastructure Investment Trusts (InvITs) under a regulated prudential framework, effective October 1.
   
   Further, the recent Taxation Bill passed by the Lok Sabha proposes to allow REIT and InvIT SPVs to opt for the concessional corporate tax regime without making the dividend component of distributions, taxable in the hands of unitholders. For investors the proposed amendment separates two decisions that were previously linked: The tax regime of the underlying SPV and the tax treatment of the dividend received by the unitholder.
   
   The RBI, meanwhile, allowed commercial banks to lend directly to REITs and Infrastructure Investment Trusts (InvITs) under a regulated prudential framework, effective October 1.
   
   Further, the recent Taxation Bill passed by the Lok Sabha proposes to allow REIT and InvIT SPVs to opt for the concessional corporate tax regime without making the dividend component of distributions, taxable in the hands of unitholders. For investors the proposed amendment separates two decisions that were previously linked: The tax regime of the underlying SPV and the tax treatment of the dividend received by the unitholder.
   
   
2. The second asset class that is now more easily available for investment is foreign equity through Gift City Mutual Funds under RBI’s Liberalized Remittance Scheme (LRS). HDFC AMC has come out with two such funds; one covering Developed Markets Funds (US, EU and Japan) and the other Emerging Markets Fund comprising companies in China, Taiwan and Korea. Essential details of these schemes are presented below.

The following are some of noteworthy features/advantages offered by these funds.
The amounts are invested in dollars under the RBI LRS scheme. Minimum investment is $ 5000 (Approximately Rs 4.8 lacs). Investment Under LRS up to Rs 10 lacs does not attract TCS. Even where TCS is collected, the same is eligible for refund or set off. The redemption is in dollars and the dollar funds can be retained in the account for six from the date of redemption. This completely eliminates rupee depreciation risk. The funds provide excellent diversification and currency hedge. The redemption proceeds are tax free in the hands of the investor. But the fund is liable to pay tax (around 14%).