Today, the Indian economy is growing at a scorching pace and the real estate sector is growing even faster. Eventually, more and more money is chasing a limited quantity of high-quality property.

This makes real estate potentially one of the best investment opportunities out there. However high prices and transactions costs make it a difficult investment for an average investor to take bets on this fast-growing sector.

Fortunately, a new investment product called real estate mutual fund is being developed which will make it easier for the average investor to invest his or her hard-earned money in real estate.

How would a real estate mutual fund work?

Since the product is at a very basic stage in India, it makes sense to look at international markets where a similar product -- the real estate investment trust (REIT) -- is quite popular. In the US alone there are hundreds of publicly traded REITs (just like we trade in shares or mutual fund units) with several hundred billion dollars in assets.

An REIT by its very nature will buy, develop and maintain property both for sale and rent and share profits with those who invest in such funds.

Like our regular mutual funds, real estate funds will also charge various fees for administrative and management expenses.

• 12 mutual fund terms you must know

There are different business models for REITs. Some of them may focus on buying and selling property thus making money on increases in value.

Others may focus on renting or leasing commercial property. Yet others may finance mortgages and earn income through interest payments on property-related loans (just like your HDFC Bank, ICICI Bank or LIC Housing Finance does).

As with mutual funds you can choose different products based on the business model you prefer.

Is it an ideal way to spread risks?

Real estate mutual funds, as being developed in India, are along similar lines. They will offer the same general advantages that mutual funds offer for investors: namely diversification and lower transactions costs.

For example suppose you want to invest in real estate in Navi Mumbai, perhaps with the expectation of rising prices as the area develops and as the nearby special economic zone, SEZ, gets going. It's not a bad investment idea but the problems are immediately obvious.

For one thing even a relatively inexpensive flat might cost upward of Rs 10 lakhs, which is obviously beyond the means of an average investor.

Even if you could obtain that kind of money, buying property involves all sorts of transactions costs.

• The ABC of index funds

Finding the flat in the first place will take a fair amount of legwork and research. Then there is the issue of negotiating the sale, obtaining proper title and dealing with potential legal disputes.

Then again even after taking ownership you will have to invest in maintaining your property.

As an investment, a single flat is obviously not adequately diversified and may not appreciate as much as you expect. Perhaps the area starts to suffer from chronic electricity or water problems dampening the value of your property. Perhaps the SEZ runs aground because of political controversies. Clearly having all your eggs in one basket is not a good investment strategy.

This is where a real-estate mutual fund comes in. The fund will invest in a large number of properties in different places thus providing much greater diversification than an individual is capable of. It will also take care of the costs of buying and managing property.

You can begin with a small amount

Most importantly it will allow you to invest small amounts of money based on your capacity.

If you only wish to invest a few thousand rupees a month it will be as easy as investing in any regular mutual fund. And as with a mutual fund, you will be able to liquidate (sell) your investment quickly and cheaply if you urgently need the funds.

• How equity funds help you make money

While real estate mutual funds, REMFs, are an exciting investment opportunity, retail investors will have wait for some time before they hit the market.

An idea whose time has come?

Currently, the Securities and Exchange Board of India (SEBI), the market regulator that approves of such schemes in India, is in the process of examining the product and is especially concerned about developing sound valuation norms for the funds.

There are real-estate funds, which have been approved, but these are venture capital funds, which are targetted at high net-worth individuals or institutions. For example the HDFC Property Fund has a minimum investment of Rs 5 crore.

However it's only a matter of time before real estate mutual funds are opened to retail investors. This will not only provide a promising new investment vehicle but will also help develop the nation by channelling savings into much needed housing and commercial projects.