Wednesday, July 23, 2014

Life Insurance: The Noble Business

This interview was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-3-4

Mr. K S Gopalakrishnan, a fellow member of the actuarial bodies of Canada, UK and India, an associate of the Society of Actuaries (USA) and fellow of the Insurance Institute of India, has been in the Life Insurance Industry for over 30 years. He has worn many a hats during this journey; Appointed Actuary, CFO, Underwriter, product developer, and now the CEO and MD of AEGON Religare Life Insurance Company and a member of the Council and Vice President of Institute of Actuaries of India.

His passion for the industry is evident in his gleaming eyes and the pride with which he talks about his involvement with the Mortality studies of Indian insured lives (1994-96) for LIC and the product innovations. In an interview with Dr. Nupur Pavan Bang, Head- Analytics, Insurance Information Bureau of India, Gopalakrishnan talks about the “noble business” of Life Insurance and its future, in India, according to him.

You have been credited with the innovation of the unit linked product (ULIPs). Does it bother you that many people lost money because of this product?

An entire business model revolving around unit linked insurance products was launched in March 2001. It changed the industry completely. The product brought transparency, liquidity and flexibility to customers. The sales process was backed by interesting features through customized benefit illustrations and the free look option.

Over the years, many challenges emerged largely related to sales process and customer understanding. The sales process sometimes involved positioning the product as a short-term product (say, three years) indicating consistent superior market returns. I am not sure if every customer fully understood the market risk associated with stock markets and the interest rate movements. This also leads to the question of whether unit linked products are for every customer segment or not. There were challenges.

When a weaker stock market started hitting, customers started comparing their policy fund values with premiums paid and then came the complaints. The product was good, is still good and will deliver customer value as long as customers realize it is an insurance-cum-investment product that has to be held for the long-term.

You pioneered concepts such as online Life Insurance, unit linked with investment guarantees and free looks in India. What has been your experience with the regulation? Do you think excessive regulation impedes growth and innovation?

I view these things as a cycle. This is an evolving market from a regulatory architecture viewpoint. The market opened up only in 2000. Everyone is learning along the line, including the insurers, management, employees. Many are new to life insurance. You talk about long-term business, and the longest experience that people have in some of the companies [private sector] in this industry is just about 10 years. I see this as a game where everyone learns and then changes.

When the opening up happened in 2000, there was complete freedom in terms of product design, pricing and largely even how distribution evolves. Towards the end of first five years of opening up, challenges around customer perceptions started emerging. To respond to those challenges, boundaries were created for product innovations in savings/investment-cum-insurance category, probably for the right reasons by the regulator.

There is still a huge scope for product innovation in the protection space. You can develop products for segments which are not yet offered insurance. Lot of data and research backing is required.

Do you mean micro-insurance? Or do you have any other segment in mind?

One is by gender (women, working women), they could be targeted. Second are health conditions which industry doesn’t rate. For example, conditions like certain types of diabetes. For every risk there is a price. Price may be unacceptable, but then we should find ways to hedge the risk and offer solutions to customers.

What about Mental health insurance? There is no such policy in India which caters to this. Do you see it as a potential area?

I am not sure. It may help if government plays an active role in this space so that more people have access to the related health care.

India has the highest savings rate in the world at around 30% of the GDP. According to 2012-13 data published by the Reserve Bank of India, a large part of it, around 65%, goes into physical assets and about 35% goes into financial assets (currency, fixed deposits, stocks, insurance, pension, etc). Life Insurance accounts for about 20% of the financial savings. In spite of this, the penetration is low in India.

When someone buys motor insurance, nobody asks, “what will I get on maturity?” In life insurance, almost everyone asks that question. As an industry, we need to answer that. People of India are skewed towards saving and investment products. This is the reason we still see life insurance positioned around savings and investments.

Also, collectively, the industry must reach out to people, campaign, and tell them the importance of insuring against dying, living longer and against falling sick. In 2008, we ran a campaign, “kum insurance lene ki bimari (K.I.L.B.) (the disease of under insurance)”. But we did not have the right distribution channel to translate this message into results. In 2009, we launched online term insurance product because we realized that there is a customer segment that wants to buy life insurance only for pure risk protection and would like to do that directly with the life insurer. I am happy to see that a large part of the industry players too have moved in this direction.

In my opinion, Insurance penetration, Premium to GDP, is not the right measure for life insurance. A right measure could be the amount of risk coverage in-force as a percentage of GDP.

Is insurance density a better measure?

The amount of risk cover in-force is perhaps a meaningful measure i.e. what is the total sum assured or death cover of the population and what is the GDP for the country?  If someone aged 35 is working today, they should be covered for 15-20 times what their annual earnings is.

A person earning Rs 50,000 month and holding a savings-cum-insurance product paying Rs 2,000 premium every month for Rs. 2.50 lakh sum assured is perhaps an inefficient and inadequate insurance cover.

Would keeping aside a small percent of the revenue or profit for awareness help? Securities Exchange Board of India has mandated an Investor Protection and Education Fund. Would a similar initiative in Insurance be helpful?

This would surely help. Awareness of life insurance should be spread. Advantage that Life Insurance has over Mutual Funds or equities is that life insurance is always viewed as a mass market product category. Life insurance reaches even people at the bottom of the pyramid. Life Insurance has more touch points than many other financial products and running a campaign should be easier.

Is there anything specific that the industry can do to capture the market? The section of society which actually needs insurance is not getting it.

I believe Life Insurance is the only business where, when the customer is no longer there, we go and pay a financial benefit. It is a noble business. In the last few years, things have become complicated. The brochures, the policy document, the terminologies, are all very complex. Very few customers read the material that is sent to them. The purchase process as well is complicated and has become time consuming. So simplifying things is important.

At AEGON Religare, as an organization, we want to try and do it [simplification] as an initiative this year.

For the period 2000 to 2010 we saw a steep growth of 30% in the life Insurance sector. But from 2010 to 2012, the growth has come down to 3%; lower than the GDP. How do you see the growth in the next ten years?

I think it will be modest for few years and then start picking up. Life insurance is a retail business. There are certain products which cater to groups or businesses, such as employer-employee term insurance, gratuity etc. But largely, it is a retail business. People like to sit across a table, understand the product and then buy. Agents play an important role. There are other channels, though agents still have the dominant share.

Training the agents is a big challenge, especially in an environment which is volatile. Things keep changing, product design keeps changing, tax requirements change, and agents need to be re-trained. People get disinterested and feel that there is no stability. There is some nervousness in the front line. That is one reason the growth has been muted.

Second reason is that in the past the industry grew on back of lot of ULIPs selling, where expectations were created about superior returns. Now, with change in product mix towards guaranteed benefits products, industry sales growth will be moderate.

Stability for the next 3 years in products regime and growth of GDP will bring back growth to the life insurance market.

Is the industry well poised to manage risks? The Banking sector in India is going through an era of high non-performing assets. Do you see an Asset Liability mismatch (ALM) happening in the Life Insurance industry in the future?

There are two types of risks (apart from operational, litigation, strategic, etc.), one is insurance risk (e.g. mortality, morbidity) and the other is investment related risk (e.g. ALM).

I don’t see mortality/morbidity as a big risk, because by and large life insurers are good at pricing this risk and underwriting this risk. Also, there is reinsurance which is for the entire term of the contract. It could also be a one-time event like a catastrophe. I think industry is good at quantifying it [the associated risk] and transferring it.

ALM risk certainly exists as everyone is writing liabilities that are of long-term. For example, products with policy term of 15 years and longer are quite prevalent. The reality is also that there are not enough investment avenues that match the liabilities by duration and cash flows. If after a few years, interest rates start dropping and reach say 2% and there is a big block of existing business, then you will see the problem starting. We are aware of the risk. We can run models quantifying the risk and set aside a reserve for the risk. But, the risk still exists.

It is an issue for the industry as there are not enough hedging avenues. This is one of the reasons why private players moved to Unit Linked products. In Unit Link we kept the mortality risk but transferred investment risk back to the customer. But I hope things will change as the regulator considers investment in derivatives for longer duration. The financial markets too have to develop depth.

Tuesday, July 22, 2014

India's economic scenario: A new perspective

This article was first published in the business section of on July 21, 2014; Co-Author: Khemchand H. Sakaldeepi

In the first article in the series of understanding how the economic machinery works, we introduced transactions, credit, interest rates and inflation. In the second article, we dealt with the importance of credit and introduced deleveraging. In the third part we delved into the impact of deleveraging and introduced fiscal deficit and quantitative easing.

This concluding part will weave all the different parts of the economic machinery together to help the readers take a view on the current economic scenario in India with a new perspective.

The case of India is very different from any other country in the world. We once controlled 25% of world GDP but today we are far from there. The major issues that we face today are:

·   Lack in the sense of building consensus to take any important and sometimes difficult decisions due to our democratic form of government
·    High inequality when it comes to wealth distribution
·   Lack of interest in becoming more productive, generally. Socialist measures and freebies are good only in the short run as they act as a tonic to the pain for people in lower income strata. But we really need to become productive in the long run so that everyone gets what they deserve. This calls for a shift in the morale and thinking in our country as a whole.

Come to think of it, whatever the ideologies of our leader are, the end result should be nothing more than well being of our fellow citizens. Health, wealth and wisdom must be easy to pursue in our country.

In fact we believe that economic progress is the answer to our disputes with China, Pakistan and also important to taken seriously by other nations. Internal problems like naxalism can also be fought with economic powers.

Even ancient wisdom suggests that economic progress is the key to power and economics is the mother of all human knowledge.

In economics there is a concept called Nash equilibrium. If we all fellow citizens were to follow our culture and wisdom from our texts then this will make us work optimally as we will do best for ourselves but also best for the group (country) hence reaching equilibrium which is the right place we deserve.

Dharma as per Bhagvad Gita has 5 parts:

Gyan – Pursuits of knowledge of self and skills required to earn a living
Samarpan – Dedication to one’s cause, that is, doing what one is required to efficiently and to the best of one’s abilities
Nyay – Have justice behind every action and decision one makes.
Prem – Compassions towards everything in this universe.
Dhairya – This comes from strengthening our sense of right and wrong such that one can withstand any randomness, entropy, risk etc. either from inside or from outside.

Nassim Nicholas Taleb speaks at length about these attributes in his recent book “Antifragile”.

The books of economics speak about rules that one needs to follow to become economically smart but our ancient wisdom speaks about principles. So if we were to live by these principles, then the nuts and bolts would automatically fit. We shall show the world new rules of economics just by our actions that emanate from such principles. Yet again.

So we end this piece asking a few questions to ponder over:
  • Isn’t it true that if something has lasted for centuries will continue to do so when compared to new books of thoughts?
  • Isn’t it true that our philosophy is simple and can be followed by anyone
  • Why don’t we dare to think like Indians and not be afraid to be different from the world?
  • Why can’t we challenge the status quo and also show light to the world. 
It is high time we regain our identity and work towards our nation’s prosperity. Some may call it Ram Rajya, or some may call it Incredible India. The point is, we have to just THINK like Indians.

Monday, July 21, 2014

Social Media Buzz on Life Insurance versus Equities

This article was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-10-11; Co-author: Anish Jain, Quadrisk Advisors

As Thomas H. Davenport and Jeanne G. Harris put it in their book “Competing on Analytics”, Analytics is the new science of winning. Harping on the virtues of Analytics would be a wasteful exercise. People are sold on the idea.

Heavy duty analytics was deployed to locate the MH370. Big data analytics was at play to effectively devise disaster management plan when hurricane Sandy hit America. Application of Analytics to retain and reward customers, design products and market them is widely in use. Banks and financial services firms use fraud analytics, social media analysis and text analytics effectively to reduce costs and improve efficiency.

The advent of Facebook, Twitter and LinkedIn has revolutionized the  the behavior of people in many spheres of lives Barrack Obama won the Presidential elections for the second term in 2012 and social media campaigning was an integral part of his overall campaign strategy. He is even called the “first social media president”! Indian political parties have been deploying social media effectively to campaign for the ongoing elections.

The impact of social media has been more significant in the field of marketing. Before buying a mobile phone, most people do research and read reviews on the internet. Similar behavior extends to other kinds of purchases including a house, car, electronics goods, books and even financial products like stocks and insurance.
Due to changes in behavior of a customer, companies have changed their marketing strategies with increase focus on social media. There is a focus to increase presence on the web, engage directly with end customers through social media and manage any adverse feedback quickly and effectively.  Social media can be used as a powerful tool to marketing, customer servicing and maintaining public relations
The significance of social media prompted us to carry out a study on the visibility of ‘Life Insurance’ on social media.

Life Insurance forms 16% of the total financial savings of Indian households. Only 3% of the savings are invested in the capital markets.

Compositing of Savings in Financial Assets of Indian Households
Source: Reserve Bank of India, 2012-13          

The Life Insurance industry has seen a gradual decline in various key parameters over the last three years.

Key parameters in relation to the Life Insurance Industry in India
Indian Life Insurance Industry
Share in Global Life Insurance Market
Life Insurance Penetration
Life Insurance Density
55.7 USD
49 USD
42.7 USD
Life Insurance Premium (in Rs.)
2.92 lakh crores
2.87 lakh crores
2.87 lakh crores
New Life Insurance Policies Issued
481.52 lakhs
441.93 lakhs
441.87 lakhs
Source : IRDA Annual Report 2011-12, 2012-13; Swiss Re, Sigma No. 3/2013

While there are numerous reasons which have contributed the decline, how does life insurance perform in terms of their presence on social media?

For the purpose of this study, social media monitoring tool Opinion Tracker was used. We tracked Web News, Social Networks (excluding Twitter) and Blogs. We compare the presence of life insurance on social media, with the stock market, for a 3-month period (29/12/2013 to 29/03/2014). Is the flow of savings into Life Insurance and stock markets proportional to their presence on the social media?

The key words used for the study were Insurance, Life Insurance, IRDA, Indemnity, Life coverage, Tax savings 80c Life Insurance, and names of various Life Insurance companies in India, to get the count for the ‘Life Insurance’ presence. Words like Nifty, Sensex, Equity, Stock, BSE, NSE and SEBI were used for finding the presence of ‘Stock Market’ on social media.

While the results can be influenced by the period of study, the use of different key words from what we have used, and other industry related reasons, the results that we got were quite astonishing, even accounting for all the different scenarios which could result in different numbers from what we have.

Life Insurance
Stock Market
Total Posts
Web News
Social Network
Maximum Posts in a day
139 (on 14/03/14)
3648 (on 20/02/14)
Minimum Posts in a day
16 (on 23/03/14)
599 (on 26/01/14)

The results shows despite so much of social media buzz for Stock Market, people prefer to invest their savings in Life Insurance. It clearly shows the tendency of Indian people to save and their risk-averse attitude. But, we would like to implore the readers to think for a moment, the kind of funds that can flow into Life Insurance market, if they upped their presence on social media!

Life insurance companies do not make much use of social media. The Life Insurance companies still rely on their agency force to spread awareness about the products. This claim is also supported by a recent survey published by Max Life Insurance-Nielsen, where 58% respondents said that Insurance awareness is generated by agents, while only 8% respondents believed that the awareness is generated by internet. They need to realize that Social Media has rapidly turned into a vital part of the modern marketing mix as well as the lives of at least the urban customers (existing or potential). A few benefits of using social media would be:
  Ø  Incomparable reach. Would help the companies explore untouched markets and reach potential customers directly without middlemen
Ø  Interact with numerous people, making them their potential customer and eventually resulting in sales.
Ø  Opportunity to showcase brand and products.
Ø  Develop a loyal community of prospects.
Ø  Enhance company trustworthiness.
Ø  Cut marketing costs.
Ø  Directly interact with customers to know their grievances and preferences

A dedicated team to spread awareness about the need for life insurance, the right cover, the products, and to engage consistently with customers would help the Life Insurance Companies to achieve growth in their business.

Research Summary: Moral, Social, and Economic Dimensions of Insurance Claims Fraud

This research summary was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-8-9; Co-author: Vishnu Vardhan Pallreddy

Professor Sharon Tennyson of the Department of Policy Analysis and Management at the Cornell University, is an active researcher in the area of Insurance Laws and Economics, is a widely acclaimed authority on matters pertaining to Insurance, on the editorial board of several Insurance related journals and has received various best paper awards for her work in the field of Insurance.

In her research paper titled “Moral, Social, and Economic Dimensions of Insurance Claims Fraud”, published in 2008, by the Social Research Quarterly, she writes that “Customer dishonesty stems from a complex interplay of motivations and circumstances, moderated by morality, opportunity, social norms, and institutional context”.

Her research deserves mention, as the Indian insurance industry is reeling due to the pressures of various types of fraudulent claims.

Tennyson succinctly reminds us that the Insurance frauds are different from other types of frauds [shoplifting or tax avoidance] as actions of a few [fraudulent claims] result in increased premiums for everyone going forward. Also, attempts to prevent fraud by the insurance companies, lead to less protection from risks than would occur in a market without fraud. It also adds to the costs of the insurers. However, policing could lead to more fraud because it erodes the trust factor and results in more costs. Most analysts believe that the costs and prevalence of opportunistic soft fraud – particularly buildup – is much higher than those of more systematic, planned or criminal claims fraud

Therefore, prevention of fraud may be a less costly alternative. However, it requires a better understanding of the different dimensions of fraud, the determinants of consumer behaviour, and the relationship between consumer behaviour and institutional rules.

Tennyson writes that much of the Insurance claims go undetected and it is difficult to estimate the number of fraudulent activities or the amount of excessive claims.

Moral hazard is an important psychological aspect of Insurance. Having Insurance reduces the insured’s incentives to prevent losses, and exaggerated or fictitious claims. Also, customers who feel that insurance companies treat customers unfairly / make too much money / charge unfair premiums, are more accepting of fraud. Evidence also suggests that consumers will be more willing to commit fraud if they perceive that the harm to others would be small.

Probability of detection, risk aversion, sensitivity to reputation penalties, social stigma, psychic costs of engaging in fraud, social norms in the form of peer group or network influences etc. are some of the deterrents to committing fraud.

Efforts to reduce prevalence and acceptability of fraud improve image of insurance industry and enhance trust between insurers and customers. General insurance education improves the knowledge of insurance as well as results in more positive attitudes toward insurance institutions. Also, fraud public awareness campaigns may also be effective.

Evidence suggests that:
a.       Extent of fraudulent claiming is very positively related to the percentage of consumers who find claims fraud to be acceptable
b.      Attitudes vary from urban to rural, women to men, elderly to young. Women, highly educated and the elderly are likely to be less accepting of fraud
c.       Consumers with more insurance experience (more policies and more claims) are less accepting of insurance fraud
d.      Moral-psychological factors in the form of ethical thinking etc impact the fraud acceptance among the survey respondents             
Trend over the years
a.       Increased attention, more empirical studies, antifraud watchdog and advocacy groups, awareness campaigns, stronger laws
b.      Much of the focus has been directed toward detecting and criminalizing fraud
c.       Fraud awareness campaigns often emphasize the criminal nature of fraud and the likelihood of being caught and penalized
d.      Success in fighting fraud is often measured by number of cases brought or convictions obtained
e.      Increasing willingness on the part of insurers to litigate fraud and refer cases to law enforcement agencies
Opportunistic soft fraud
a.       Widely believed to be much more prevalent than criminal fraud
b.      Improving fraud detection and advertising this fact may provide an effective deterrent
c.       Many consumers do not view some forms of claims exaggeration as fraudulent
d.      A criminal focus applied to these cases may reinforce negative perceptions of insurance institutions and their fairness to customers

When internal monitors are primed, most customers state that insurance fraud (even minor claims exaggeration) is unacceptable. Consumers with more insurance experience and those with recent claims experience are less likely to believe that claims exaggeration is acceptable. Greater focus on social and psychological dimensions of insurance claims fraud may increase the success of soft fraud prevention without impairing insurance relationships.


Tennyson, Sharon., “Moral, Social, and Economic Dimensions of Insurance Claims Fraud”, Social Research, Vol. 75, No. 4, Fraud (WINTER 2008), pp. 1181-1204

Best investment options in the real estate sector

This article was first published in the business section of on July 18, 2014; Co-Author: Pooja Bajaj

This rise in urbanisation and economic affluence supported with significant infrastructure developments, government initiatives and demand-supply gap has triggered development across real estate spectrum says Pooja Bajaj and Nupur Pavan Bang.

India, the world’s fourth largest economy with 1.2 billion people, has steadily emerged as one of the most preferred destinations for global business. 

Consequently, this has fuelled demand for real estate across verticals viz residential, commercial and hospitality.

On account of globalisation, favourable socio-economic profile, natural features, demographics and government initiatives, the Indian realty sector is being viewed as one of the most favourable destinations for investors and developers globally. 

Increase in the natural and migrant populace in cities in search of jobs and business opportunity who are keen to invest in real estate, coupled with rising per capita income, have given a major demand boost in the sector. 

According to the United Nations estimates, India leads in the rate of change of urban population amongst all the BRIC nations (Brazil, Russia, India and China). 

It is estimated that 843 million people will reside in cities by 2050 in India, which is equal to combined population of the US, Brazil, Russia, Japan and Germany. 

Favourable government reforms and policies such as repealing of Urban Land Ceiling Act, altering FSI rules, allowing 100 per cent FDI in the construction development through automatic route, approving the recent Real Estate (Regulation and Development) Bill, 2013, have further strengthened confidence of investors in the sector. 

This rise in urbanisation and economic affluence supported with significant infrastructure developments, government initiatives and demand-supply gap has triggered development across real estate spectrum. 

Apart from residential, commercial and hospitality, development of educational and healthcare institutions has further widened the scope of opportunities for the sector. This development is now not restricted only to metropolitan cities but is quickly gaining momentum even in Tier II and III cities as well.

As per an IBEF report on the sector, “the second largest employment generation sector after agriculture, real estate contributes about 6.3 per cent to India's gross domestic product (GDP). The real estate sector of India is projected to post annual revenues of $180 billion by 2020 against $66.8 billion in 2010-11, a compound annual growth rate (CAGR) of 11.6 per cent.  The foreign direct investment (FDI) in the sector is expected to touch $25 billion in the next 10 years from its current $4 billion”. 

The construction development sector, including townships, housing and built-up infrastructure garnered total FDI worth $22,671.95 million in the period April 2000-August 2013. Construction (infrastructure) activities during the period received FDI worth $2,280.95 million, according to the Department of Industrial Policy and Promotion (DIPP).

The real estate prices over the past decade has increased manifold across cities. During the period Q2-2009 to Q3 -2013, India has witnessed an increase in residential apartment prices by over 50% on an average.

As per Knight Frank Research, since 2009, IT/ITeS driven markets of Bengaluru, Pune and Chennai have witnessed a minimum of 38 per cent increase in weighted average price.

However, currently it’s mainly the affluent investors who are able to reap the benefits of high return in the sector. 

Despite the desire to invest in realty, the mid-income-segment populace of the country is not getting the right opportunities primarily on account of large ticket size, transaction costs coupled with high home loan interest rates.

For example, the overall ticket size of an apartment may vary from about Rs 3.6-3.8 mn (considering an average 2 Bedroom, Hall and Kitchen apartment of 1200 sq.ft.) in business districts such as Madhapur, Kondapur and Gachibowli situated at a distance of about 8-12 kms from prime residential areas in Hyderabad.

From investment perspective, an amount of about Rs 4 mn for direct purchase of property is not only a large ticket size for a small investor, but this option involves several risks related to title of the property and furthermore benefits of diversification are also not available. 

While housing loans are available, the high interest rate regime in India, makes taking loans against property a less attractive option. 

Investment Vehicles
Real Estate Fund is a vehicle that can bridge the gap between properties and investors.

A real estate fund is a professionally managed portfolio of diversified real estate holdings which invests pooled funds in residential, commercial, corporate or rental properties. 

Globally, in the recent years, different types of fund vehicles available to, and chosen by, sponsors and managers of real estate funds have proliferated. 

HDFC, Birla Sun Life, Kotak, ICICI Prudential, ASK, Piramal Group, Milestone etc have introduced real estate funds through the Portfolio Management Services (PMS) route or the Venture Capital route or the Private Equity route which primarily raise funds from Indian HNIs. 

However, most of these funds came into existence before the Alternate Investment Fund (AIF) guidelines were implemented by Securities and Exchange Board of India (SEBI).

AIF, notified by SEBI in May 2012 in India, allows pooling of funds from Indian and foreign investors for investments in areas like real estate, private equity and hedge funds.  

As per the guidelines, AIFs shall be close-ended funds and have tenure of atleast three years with a maximum number of 1000 investors. Further, the minimum investment to be accepted by AIFs from a single investor is Rs 1 crore (Rs 10 million), thereby differentiating retail investors and long-term high-net-worth individual (HNI) investors.

Another popular vehicle for investment is Real Estate Investment Trust (REIT). To enable real estate investors reach capital markets, in 2008, SEBI had issued certain draft regulations for introducing REITs and later in October 2013, SEBI announced the draft consultation paper on REIT Regulations. 

As per the regulations, REITs in India would issue securities, which would be listed on stock exchanges and will invest 90 per cent of the net asset value in completed rent generating properties in India and remaining in developmental properties, listed/unlisted debt of companies, mortgage backed securities etc.

They may raise funds from any investors, resident or foreign. It is proposed that initially the units of the REITs may be offered only to HNIs/institutions and therefore, the minimum subscription size shall be Rs 2 lakh.

REIT shall provide investors a real estate investment vehicle which has characteristics similar to mutual fund and Exchange Traded Fund structures for stocks, bonds and other securities. 

REITs offer several benefits as they will be listed, will provide regular and stable source of income for investors with least project execution risk. However, the proposed initial investment requirement of INR 2 lakhs may be high for some retail investors, though they are much lower than the minimum required investments in AIFs.

In 2008, SEBI issued guidelines for Real Estate Mutual Fund (REMF) in India. Similar to a Mutual Fund, a REMF is a scheme of a trust fund set up to manage pooled money of unit holders by investing in real estate projects, mortgage-backed securities as well as equity/debt/debentures of real estate companies.

These funds are close-ended and listed on stock exchanges. In addition to earning returns from properties by way of rents and capital appreciation, these funds also get interests, dividends and share price appreciation from securities of real estate companies.

Issues related to valuation, lack of clarity and uncertainties have deterred players from launching REMFs till now in India. However, with strong fundamentals and improving transparency in property market, REMFs are expected to make it easier for an average investor to invest in real estate. 

With such funds, even by investing an amount of say INR 10,000 - 20,000, investors may be able to own a small portion in a high value property.

It will also provide significant benefits of diversification as investors may be able to invest in different types of properties across different cities without getting into cumbersome paperwork.

There are certain critical differences between a REIT and REMF. REITs have to invest 90 per cent of the net asset value in finished real estate projects and not more than 10 per cent in developmental properties.

However, REMFs have to invest at least 35 per cent in finished projects and at least 75 per cent of the corpus in real estate or related securities, and therefore they can invest in under-development properties to a large extent. 

While REITs offer investors a regular income, REMFs gives capital appreciation too on account of investment in under-construction projects.

Indian real estate is one of the most sought after investment destinations for both HNI investors and retail/small investors. 

However, currently most of the investment vehicles – direct purchase or AIF available are primarily targeting or can attract only HNIs on account of huge ticket size for investment. 

REITs have also been proposed to target HNIs initially. For an average investor, investments can be routed through REMF or Real Estate ETF. Both these options are currently either not available or not successful.

The government should consider the need of these investors who wants to participate in the sector. This will provide further impetus to the sector by supplying additional source of capital via retail investors' money.

This might also reduce black money in the sector significantly by making operations of various stakeholders involved more transparent and accountable.