Investing in Pieces: The Modern Appeal of Fractional Ownership

Investing in Pieces: The Modern Appeal of Fractional Ownership

Ownership traditionally implies having full control over an asset. But what if the asset is too expensive for the average person to afford? This is where fractional ownership steps in, allowing multiple investors to own a share of a high-value asset. Let’s dive into this intriguing concept that’s gaining popularity in the financial world.

What is Fractional Ownership?

Imagine bringing your own food or drink to a party – everyone contributes something, and everyone enjoys the feast. Fractional ownership operates on a similar principle. It allows unrelated parties to collectively own a portion of an expensive asset, democratizing ownership. This asset could be a jet, a yacht, commercial real estate, a luxury villa, or even a warehouse. The income and expenses related to the asset are shared among investors based on their investment proportion.

Today, even physical assets like vehicles, equipment, and leased furniture are available for fractional ownership. The entry point for these investments can be as low as ₹20,000. In the realm of real estate, fractional ownership legally divides ownership rights among multiple owners. For instance, you can invest in pre-leased commercial real estate with as little as ₹5 lakh. These investments are typically structured through a Special Purpose Vehicle (SPV), where the funds are pooled to own and manage the property, and investors hold shares in the SPV.

Why is Fractional Ownership Important?

Fractional ownership is often marketed for assets that are otherwise illiquid, unaffordable, or difficult for individual investors to manage. Besides the appeal of owning a piece of luxury or commercial property, fractional ownership provides a way to diversify your investment portfolio. However, it’s essential to recognize the potential pitfalls. Unlike shares or bonds, these assets don’t guarantee income, and their value can fluctuate.

Moreover, fractional ownership has historically been fertile ground for scams. In the 1990s, schemes selling ownership rights in teak trees, emu farms, and orchards ended disastrously for many investors. Physical assets can depreciate over time, and as a fractional owner, you need to ensure that your investment yields enough return to offset this depreciation. This requires a solid understanding of the asset and careful consideration of the purchase price.

Why Should You Care?

With the increasing interest in portfolio diversification, fractional ownership opportunities are now being marketed to ordinary investors. If you already have investments in bonds, shares, mutual funds, ETFs, and even cryptocurrencies, fractional ownership might seem like an attractive addition. Promises of double-digit returns and steady income projections are common selling points.

Fintech platforms have emerged as intermediaries in these deals, claiming to conduct stringent asset selection, due diligence, and execution of sales. These platforms also manage oversight, reporting, and major decisions on behalf of investors. However, be mindful of the fees involved – annual management fees, performance fees above a certain hurdle rate, and fees on income earned from the asset. While some platforms allow investors to sell their shares after a lock-in period, this depends on finding a willing buyer.