Parking money in real estate is considered the best investment by the investor community. For investors in the middle-income group, buying a piece of land has become a dream, while stocks, bonds, fixed deposits among others are within their reach.

A booming economy and surging activity in the real estate sector following a growth in demand for office and residential space are driving large financial firms and private equity funds to launch exclusive funds targeted at the real estate sector. Popular in the West and a relatively new proposal in India, real estate funds allow such people to invest in real estate and share profits and appreciation. With the Finance Minister allowing foreign direct investment (FDI) in property development in his latest budget proposals, the real estate market will have some depth.

So, what exactly are real estate funds? Equity funds invest money in volatile stock markets. Debt funds pump in money into debt instruments. On the same lines, as the name suggests, real estate funds put money in real estate and the investors have their share in the cake of lucrative benefits. There are no masons or contractors. Yet, your money remains invested in real estate and fast appreciates with the land prices. Real estate funds can remain invested in office buildings, healthcare facilities, industrial properties, hotels, shopping centres and even residential buildings. What makes real estate funds attractive?

Real estate has been always been a hedge against inflation and has given a tough competition to common stocks. However, the need for high investments typically running into lakhs of rupees deters many people. By investing in real estate funds, one can own shares in several properties with an investment of a few thousand rupees. You get a chunk of capital appreciation or rentals proportionate to your investment. Another positive aspect of real estate funds is diversification. The fund remains invested in properties that are geographically apart, built by different developers, and used for both residential and commercial purposes. Like all other investment vehicles, these funds have seen both lows and peaks.

And ebbs are a possibility you cannot out rightly reject or ignore. Though the whole concept of how real estate funds works makes investors believe that it is predictable and lucrative, there is an element of uncertainty and unpredictable risk that could work against your interest. Natural disaster or fire could raze down the properties that the fund house holds, eroding your investments in return. Occupancy rates could dwindle for numerous reasons, biting into your income.

HDFC and ICICI Venture, which have announced plans for real estate funds, are likely to collect between themselves at least Rs. 2,000 crores from domestic and foreign investors. While HDFC's Property Fund is likely to raise about Rs. 1,000 crores, ICICI Venture's India Advantage Fund-3 is expected to mop up at least $225 million, according official sources. HDFC has launched this fund jointly with State Bank of India. This fund would invest in equity and equity linked instruments of companies engaged primarily in real estate in major cities in India.

HDFC's Property Fund has an initial target of Rs. 750 crores and a greenshoe option of about Rs. 250 crores. It is targeted towards banks, insurance companies, corporates and high networth individuals initially.

Kotak Mahindra and Infrastructure Leasing & Financial Services (IL&FS) are two other firms looking to launch separate funds. Kotak may launch a $100 million fund that will invest in real estate projects, such as IT parks, shopping malls and commercial and residential shopping complexes. Strong economic growth, increased foreign investment and the prospect of growing demand for office and residential space are spurring interest in real estate funds.

The UK-based financial services firm, Dawnay Day, has stated that it will launch a $50-100 million fund to invest in hotel properties and townships of over 100 acres. That was before the government liberalised FDI norms in the sector. Interest in India's real estate sector from offshore funds is strong. The new FDI norms bring investment in all kinds of real estate projects under the automatic route. The norms relating to the land area have been eased to 25 acres from 100 acres earlier.