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Business News/ Money / Demat Account: What are REITs and how to invest in them? MintGenie explains
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Demat Account: What are REITs and how to invest in them? MintGenie explains

REITs allow investors to participate in the real estate market without direct ownership, offering returns through dividends and potential capital appreciation. Investing in REITs through a demat account involves choosing a broker offering access to REIT investments, researching suitable REITs.

REITs operate similarly to stocks, as they undergo the IPO process and subsequently get listed on stock exchanges. Like investing in stocks, investing in REITs also necessitates a demat account.Premium
REITs operate similarly to stocks, as they undergo the IPO process and subsequently get listed on stock exchanges. Like investing in stocks, investing in REITs also necessitates a demat account.

Demat account has evolved beyond mere equity trading, now offering investors a spectrum of avenues to diversify their portfolios across various asset classes. Apart from stocks, investors can seamlessly venture into bonds, mutual funds, ETFs, as well as Real Estate Investment Trusts (REITs).

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Traditionally, Indians have favored real estate investments due to their potential for capital appreciation and steady rental income. However, this required substantial capital, typically ranging from 50 lakh to 1 crore, especially in metropolitan areas.

For investors seeking exposure to real estate without hefty investments, REITs provide a viable alternative. REITs enable individuals to participate in the real estate market without the need for a substantial corpus, offering accessibility and diversification.

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Also Read: 4 key implications of insider trading regulations on demat account holders

In this article, we will delve into the concept of Real Estate Investment Trusts and elucidate how investors can leverage their demat accounts to engage with them effectively.

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What are REITs?

Real Estate Investment Trusts are investment vehicles that own, operate, or finance income-generating real estate across various sectors, such as commercial properties, residential complexes, or infrastructure projects. They allow individual investors to invest in real estate assets without directly owning or managing them.

REITs collect funds from investors and allocate them to real estate ventures such as office spaces and shopping malls. Subsequently, they distribute the generated returns to the investors.

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Consider an example with "ABC REIT," which specialises in the ownership and management of shopping malls spread across various cities in the country. Instead of purchasing an entire shopping mall, individual investors have the option to acquire shares of ABC REIT.

When investors buy shares of ABC REIT, they essentially become partial owners of the portfolio of shopping malls that the REIT owns. As the shopping malls generate rental income, ABC REIT distributes a portion of that income to its shareholders in the form of dividends.

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Investors can earn returns from REIT investments through dividends and potential capital appreciation if the value of the underlying real estate assets increases over time. Additionally, REITs are often traded on stock exchanges, providing investors with liquidity and ease of buying and selling their investment shares.

In India, there are two primary types of Real Estate Investment Trusts: equity REITs and mortgage REITs.

Equity REITs: In the case of equity REITs, commercial entities such as Mindspace own and operate properties like offices, hotels, and shopping malls. These properties generate rental income, which is then distributed among all the REIT holders in proportion to their holdings. Essentially, investors in equity REITs benefit from a share of the rental income generated by the underlying real estate assets.

Mortgage REITs: Mortgage REITs function differently from equity REITs. In this type of REIT, commercial entities primarily focus on the financial aspect of properties, whether residential or commercial. 

They typically invest in mortgage-backed securities or provide financing for real estate projects. Mortgage REITs earn interest income from these investments, which is then distributed to the REIT holders in proportion to their holdings. 

Also Read: Demat Account: 10 crucial things you should keep in mind as a beginner

Essentially, investors in mortgage REITs earn returns in the form of interest income derived from the financing activities of the underlying real estate assets.

Both equity and mortgage REITs offer investors the opportunity to participate in the real estate market and earn returns, albeit through different mechanisms. While equity REITs provide exposure to rental income from directly owned properties, mortgage REITs generate returns through interest income from financing real estate transactions.

How do I invest in REITs through a demat account? 

REITs operate similarly to stocks, as they undergo the IPO process and subsequently get listed on stock exchanges. Like investing in stocks, investing in REITs also necessitates a demat account.

Currently, there are only 3 REIT funds in India: Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. 

To invest in Real Estate Investment Trusts using a demat account, you can follow these steps:

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Choose a Broker: Ensure you have a demat account with a brokerage firm that offers access to REITs. Not all brokers provide access to REIT investments, so check with your broker or consider opening an account with a brokerage that does offer this option.

Research REITs: Conduct thorough research to identify REITs that align with your investment goals, risk tolerance, and portfolio diversification strategy. Look into factors such as the types of properties the REIT owns, its financial performance, dividend yield, and management quality.

Place an Order: Once you've selected the REIT you want to invest in, log in to your brokerage account and place an order to buy shares of the REIT. Enter the ticker symbol of the REIT and specify the number of shares you wish to purchase.

Review and Confirm: Before finalising your order, review the details to ensure accuracy, including the number of shares, price per share, and any associated fees or commissions. Once you're satisfied, confirm the order to execute the trade.

Monitor Your Investment: After purchasing shares of the REIT, keep track of your investment by monitoring its performance regularly. Stay updated on any news or developments related to the REIT and the broader real estate market that may impact its value.

Consider Diversification: As with any investment, consider diversifying your portfolio by investing in multiple REITs across different sectors or geographic regions to spread risk and enhance potential returns.

FAQs

What are Real Estate Investment Trusts (REITs) and how do they work?

Real Estate Investment Trusts (REITs) are investment vehicles that own, operate, or finance income-generating real estate properties. They allow individual investors to invest in real estate assets without directly owning or managing them. 

Can I invest in REITs through my demat account? 

Yes, you can invest in REITs through your demat account. REITs operate similarly to stocks, as they undergo the IPO process and subsequently get listed on stock exchanges. 

What are the different types of REITs available in India? 

In India, there are primarily two types of REITs: equity REITs and mortgage REITs. 

How do I choose the right REIT to invest in? 

To choose the right REIT, conduct thorough research to identify REITs that align with your investment goals, risk tolerance, and portfolio diversification strategy. Consider factors such as the types of properties owned by the REIT, financial performance, dividend yield, and management quality.

What steps do I need to follow to invest in REITs using my demat account? 

To invest in REITs using a demat account, follow these steps: Choose a broker that offers access to REITs, research REITs to identify suitable investments, place an order to buy shares of the chosen REIT, and review and confirm the order details. Monitor your investment regularly, and consider diversifying your portfolio by investing in multiple REITs.

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Published: 06 May 2024, 05:00 PM IST
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