In a new welcome development for housing finance companies (HFC) SEBI has allowed the debt oriented mutual funds to invest up to 10% of their net asset in HFCs. Earlier it was bundled into the 30% cap which applied for all companies in the financial sector. This is especially welcome at a time when there is a fair amount of uncertainty around real estate sector as a whole. The stock price for HFCs moved up after in light of this news. So in simple terms what does this mean? Should you put some money in the HFC stocks?  We would say yes, unless it is a short run highly leveraged investment (in which case our suggestion is: stay away from the equity market).

Here is the reason. Mutual funds come in with serious cash, and also are patient investors. We emphasize the word patient investor because currently investment related to real estate needs patient investor with eyes for the long run. At this time real estate is perhaps the best long term investment opportunity out there but is prone to high volatility in the short run. If we allow ourselves to be a little nerdy, then we will say that it has the best long run Sharpe ratio (best return per unit of volatility). Naturally, the profitability for the HFCs will more or less mirror this underlying truth.  Thus, while your typical equity investor or hedge funds with relatively short investment horizon may find it too risky, it will be ideal for mutual funds. Mutual funds are combination of deep pocket and long investment horizon (remember, they don’t need to provide spectacular returns on their investments) we expect them to invest in this sector. This will boost the overall demand for HFC stocks in the long run leading to a profitable trend for the future.  So what are you waiting for?