Top 5 Mutual Funds to Invest in India’s Real Estate Sector in 2025

The Indian real estate sector, which stands as one of the most crucial pillars of the nation's economy, comprises four sub-sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth in the corporate environment and the demand for office space as well as urban and semi-urban accommodation.

Moreover, with the rise of e-commerce, warehousing demand has boomed. Organised players are developing high-grade warehouses, and foreign direct investments (FDI) are further boosting this segment.

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The government has introduced several reforms and policies to support and regulate real estate, including:

• Real Estate Regulatory Authority (RERA): Established in 2016, RERA has instilled transparency and accountability, making it safer for investors and end-users by regulating the sale of real estate.

• Pradhan Mantri Awas Yojana (PMAY): This scheme aims to provide affordable housing to urban and rural populations. It offers interest subsidies for home loans, stimulating demand in the affordable housing segment. As per the Union Budget 2024-25, PM Awas Yojana Urban 2.0 will address housing needs for 1 crore urban poor and middle-class families with a Rs. 10 lakh crore (USD 120.16 billion) investment.

• Smart Cities Mission: Under this initiative, the government aims to develop urban areas with better infrastructure and services, boosting real estate development in these cities.

• Increased FDI in Real Estate: The government has allowed 100% FDI in real estate, especially in construction, which has attracted foreign players and private equity funds.

• Infrastructure Status for Affordable Housing: This status allows companies in affordable housing to access lower interest rates and easier financing.

In FY 2023, India's residential property market witnessed the value of home sales reaching an all-time high of Rs 3.47 lakh crore (USD 42 billion), marking a robust 48% YoY increase. By 2040, the real estate market will grow to Rs 65,000 crore (USD 9.30 billion) from Rs 12,000 crore (USD 1.72 billion) in 2019. The real estate sector in India is expected to reach USD 1 trillion in market size by 2030, up from USD 200 billion in 2021 and contribute 13% to the country's GDP by 2025.

India's physical retail landscape is poised for a substantial boost, with nearly 41 million sq. ft of retail developments set to be operational between 2024 and 2028 across the top 7 cities, encompassing projects in various stages from construction to planning.

Reserve Bank of India (RBI) states in the past 4 years until March 2024, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have amassed USD 15.60 billion (Rs 1.3 lakh crore).​ According to a Cushman & Wakefield report, India's real estate market saw a surge in investments during the second quarter of 2024, attracting USD 2.77 billion.​

By 2030, 25 million more affordable housing units will be needed to accommodate the nation's expanding urban population.

[Read: Top 5 Mutual Funds Paving the Way to Wealth with Indian Road & Highway Stocks]

What Is the Future Outlook for the Indian Real Estate Sector?

The Indian real estate sector has been experiencing remarkable growth, with the residential market alone reaching a historic milestone in FY 2023. This robust recovery signals a thriving market that remains resilient despite challenges posed by global economic uncertainties. Looking ahead, the long-term potential of the Indian real estate market appears highly promising.

As India continues to grow and develop, the real estate sector is poised to play an even more crucial role in shaping the nation's future. Technology plays a pivotal role in the real estate sector; property buying is revolutionised by Augmented Reality (AR) and Virtual Reality (VR), allowing buyers to explore properties remotely and visualise their future homes and office spaces virtually.

The sector is expected to witness continued growth across residential, commercial, and logistics real estate, offering investors lucrative opportunities to capitalise on its expansion. Responding to an increasingly well-informed consumer base and considering the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. As India's real estate market continues to mature, it will remain a key pillar of the country's economic development, attracting both domestic and foreign investments.

The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform, which will allow all kinds of investors to invest in the Indian real estate market. It would create an opportunity worth Rs 1.25 trillion (USD 19.65 billion) in the Indian market in the coming years.

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When it comes to investing, real estate has long been considered a lucrative avenue for generating returns. It is a common asset class found in diversified investment portfolios. Real estate equities are in a prime position to capitalise on the exploding demand for properties across multiple categories as India continues its development trajectory.

To realise the potential benefits of this booming industry, investors may participate in this sector by investing in mutual funds that focus on real estate stocks. However, careful research and analysis are essential when selecting these funds. Sector-oriented mutual funds focus on companies involved in real estate development, construction, and related sectors. These funds invest in real estate stocks and other infrastructure companies that benefit from the growth of the real estate sector.

Here are the top 5 mutual funds with a high allocation to real estate stocks:

#1 Tata Housing Opportunities Fund (Thematic Fund)

Launched in September 2022, Tata Housing Opportunities Fund invests in equity and equity-related instruments of entities engaged in and/or expected to benefit from the growth in housing theme. The fund holds a 40.35% allocation to large-cap stocks, 21.39% in mid-cap stocks and 30.97% in small-cap stocks as of October 2024.

However, since the scheme was launched a few years ago, it does not have a long performance track record. Thus, investors may consider their suitability before investing in it.

The overall allocation to real estate stocks is around 17.94%, and the highest is in stocks of Prestige Estate Projects Ltd., a leading real estate developer in South India, particularly known for its large residential and commercial developments in Bangalore, Chennai, and Hyderabad. The company has expanded into retail, hospitality, and office space, becoming a versatile player in the industry.

The fund holds a 4.10% allocation to DLF Ltd., one of India's largest real estate companies, known for developing residential, commercial, and retail properties across the country. With a strong presence in Delhi-NCR, DLF has played a significant role in shaping India's urban landscape.

The scheme also holds fair exposure to other stocks like - Brigade Enterprises Ltd., TARC Ltd.(engaged in the business of development of Residential Projects, Hotels, Branded and Service Apartments and Warehouses in NCR Delhi) and Suraj Estate Developers Ltd., which are market leaders in the segment.

#2 HDFC Housing Opportunities Fund (Thematic Fund)

HDFC Housing Opportunities Fund seeks to invest predominantly in equity and equity-related instruments of entities engaged in and/or expected to benefit from the growth in housing and its allied business activities. The scheme currently has an AUM of Rs 993.28 crore and is benchmarked against NIFTY Housing TRI.

The scheme invests across market cap, and as of October 2024, it holds 60.05% allocation in large caps, 7.67 in mid-caps and 32.30% in small caps. Do note it has a higher allocation to small-cap stocks, which are highly risky and sensitive to market fluctuations.

The scheme holds a maximum exposure of 6.42% in stocks of Prestige Estates Projects Ltd. and 3.30% in Ashoka Buildcon Ltd., a Fortune India 500 company and one of the leading highway developers in India. The scheme also carries an allocation to Macrotech Developers Ltd. Currently, the overall exposure to real estate stocks accounts for 11.21% of the scheme's assets.

#3 ITI Large Cap Fund (Market Cap Fund)

ITI Large Cap Fund seeks to generate capital appreciation & provide long-term growth opportunities by investing in a focused portfolio of large cap - blue chip companies. The fund holds 82.70% allocation to large-cap stocks, 0.85% in mid-cap stocks and 12.77% in small-cap stocks, as of October 2024.

Launched in December 2020, the scheme holds an AUM of Rs 360.06 crores; since it's been a few years, it does not have a long performance track record. Thus, investors may consider their suitability before investing in it.

The overall allocation to real estate stocks is around 10%. The major allocation draws to RIL Ltd., which recently announced the incorporation of a new subsidiary, Reliance Jai Properties Private Limited (RJPPL), expanding its footprint in the real estate sector. The scheme also holds fair exposure to other market leaders like - DLF Ltd., KNR Constructions Ltd., and Brigade Enterprises Ltd.

ITI Large Cap Fund has a small yet strategic allocation to real estate, potentially as a hedge and a diversification strategy. Such allocations provide the fund with some exposure to the growth opportunities in India's real estate market, which has seen a significant boost in both residential and commercial real estate demand.

If the sector performs well, the fund may capitalise on its growth while balancing risk across other stable sectors.

#4 ICICI Pru Mid Cap Fund (Market Cap Fund)

Launched in October 2004, ICICI Pru Mid Cap Fund invests in equity and equity-related securities and aims to generate capital appreciation by actively investing in diversified mid-cap stocks. Currently, the scheme holds an AUM of Rs 6,330.47 crores and is benchmarked against Nifty Midcap 150 TRI.

The fund holds a 15.13% allocation to large-cap stocks, 69.83% in mid-cap stocks and 13.90% in small-cap stocks, as of October 2024.

The overall allocation to real estate stocks is around 9.14%; the scheme holds fair exposure to the real estate market, like - The Pheonix Mills Ltd., specialises in the development and management of large-scale retail-led mixed-use properties in India. Known for its iconic malls like High Street Phoenix in Mumbai and Palladium in Chennai, Phoenix Mills is a leader in the retail real estate sector.

Godrej Properties Ltd. engaged in the development of residential, plotted, and mixed-use properties, focusing on innovation, sustainability and design. Godrej Properties offers homes, land ownership opportunities, and integrated developments that include residential, commercial, retail, and civic buildings.

Since this is a pure mid-cap scheme, investors may consider their suitability before investing in it based on risk tolerance, investment horizon and goals.

#5 - HSBC Infrastructure Fund (Sectoral Fund)

HSBC Infrastructure Fund provides investors with opportunities for long-term capital growth through active management of investments in a diversified basket of equity stocks of companies directly or indirectly involved in the infrastructure sector. Launched in the scheme, it holds an AUM of Rs 2,611.16 crores.

As of October 2024, the fund has a 47.56% allocation in large-cap stocks and 13.15% in mid-cap stocks, whereas 36.55% in small-cap stocks. Do note it has a higher allocation to small-cap stocks, which are highly risky and sensitive to market fluctuations.

The scheme has an overall allocation of 6.83% to real estate stocks. The scheme has significant exposure to RIL Ltd. and Brigade Enterprises Ltd. The company constructs and develops residential, commercial, educational, retail and hospitality projects. The scheme also carries an allocation to leading real estate stocks like - The Phoenix Mills Ltd., DLF Ltd. and Ahluwalia Contracts (India) Ltd.

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Although sectoral mutual funds could be a good diversifier to your portfolio, it takes at least a few years to reach their potential. Hence, investors may consider taking a plunge into these mutual funds only after thorough market research and assessing their suitability.

To Summarise...

India's real estate sector holds immense potential in 2025, with a surge in both residential and commercial developments driven by urbanization, infrastructure growth, and government initiatives. Investing in mutual funds focused on the real estate sector can provide an accessible entry point for investors looking to capitalize on this growth without directly owning property.

However, while these funds offer exposure to the thriving real estate sector, it's essential to consider the associated risks. Real estate funds may experience volatility due to market cycles, interest rate fluctuations, and regulatory changes. Investors should carefully assess their risk tolerance and investment horizon before committing to this sector, ideally with a long-term perspective to weather any market fluctuations.

As with any investment decision, conducting thorough research or consulting a financial advisor can help ensure your real estate sector investments align with your overall portfolio goals. The journey in real estate investment can be rewarding if you remain well-informed, patient, and strategic, positioning yourself to reap the benefits of this dynamic sector over time.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.