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OLM Desk - 29 October 2022

Fractional Ownership Is Too Risky For Retail Investors

Jagdeep Singh

Is it safe to invest in commercial real estate by way of fractional ownership? I do not want my investment to remain locked up in real estate for too long, maybe 3-5 years, at most.

Fractional ownership in commercial real estate is a relatively new concept. The company offering it comes under the ambit of the Registrar of Companies (RoC) under the Ministry of Corporate Affairs. The investment portal offering the services has to obtain a licence from the Real Estate Regulatory Authority (RERA) for operations. All payouts, including rental income and proceeds from sale of the property are managed by the trusteeship company.

That said, these platforms do not guarantee returns, but only offer indicative returns for the property.

Fractional ownership is highly risky, as the investment is both thematic and sectoral. In the last few years, many IT companies have adopted a “work from home” model, which has severely hit occupancy and, consequently, rental incomes in commercial real estate. Economic downturns would also hit profitable exits, as there would not be any takers for the property.

So, one should have a long-term perspective of at least 3-5 years before committing funds.

Besides, rental income is subject to 10 per cent tax deducted at source (TDS), while the profit from the sale of the commercial property is taxed as either long or short-term capital gain depending on the period of holding.

Also, unlike real estate investment trusts (Reits), this is not regulated by the Securities and Exchange Board of India (Sebi) and, therefore, is less secure.

Given the huge sums to be committed and the risks involved (though indicative returns are high), retail investors would be better off staying away from such investments.

Suhel Chander, CFPCM, Handholding Financials

Kingshuk Jena

I have been investing in mutual funds for a while now. I have acquired a basic understanding of how the stock market works. I want to try my hands at stock investing. What are the factors I need to consider as part of the analysis before picking a stock?

Most investors lose money when they invest on a tip received from sources, i.e., media (social or mainstream), friends and messages. Worse, they often do this without getting convinced about the strength of the stock, or their own risk profile.

To start with, you should first know your risk profile, i.e., whether you are a conservative, moderate or aggressive investor. Then decide on your investment horizon. Accordingly, construct your stock portfolio by picking up a mix of large-, medium- or small-cap stocks.

To pick a stock, first decide on the theme, i.e., companies and, particular stocks, if any, and so on. Also, decide on the number of stocks you plan to hold, keeping in mind your risk profile and return expectations. Make sure you do not load up your portfolio with one particular stock or sector, as a downturn could negatively impact your overall portfolio.

As a rule of thumb, look for quality stocks that are fundamentally strong in the long term, based on market capitalisation. Also, check financial ratios, such as liquidity, debt and profitability. Check the valuation on the basis of these fundamentals, and compare it with peers. If the valuation is expensive, but the future of the company, product, sector, looks promising, then buy it at the downward price moment.

Also, check the quarterly results, the overall sector, and the generic country or global trend.

Someone who is fresh into his/her job, has no responsibilities or dependents, has a high risk-taking capability, and wants to start investing with long-term goals, can pick up mid- or small-cap stocks based on market capitalisation.

Someone aged around 35-45 years with responsibilities and dependents, can pick up a mix of large-, mid- and small-cap stocks based on risk profile for medium- to long-term goals.

Hina Shah CFPCM, Financial Coach, LUHEM

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