Investors who are looking for an affordable option to invest in real estate now have an alternative. Real estate mutual funds are quite similar to mutual funds in terms of the purpose which they fulfill. Both these types of funds have a common end-goal, which is maximizing the returns on your investment. Similar to mutual funds, real estate mutual funds are also are started by experienced real estate experts / professionals who manage the real estate or property for the investor.
What are Real Estate mutual Funds
A real estate mutual fund (REMF) is a type of mutual fund which mainly concentrates to invest in securities which are offered by public real estate companies. Known by the name of Real Estate Investment Trusts or REITs in the United States, a large chunk of these funds are invested in corporate and commercial properties. In addition, REMFs may also be invested in apartment complexes, raw land and agricultural areas. Real estate mutual funds can invest directly or indirectly in property via REITs.
Why Invest In Real Estate Funds
Owing to the fact that real estate is one of the most profitable sectors, real estate mutual funds have become one of the most popular investments, ever since they have been available for Indian investors. Just like mutual funds allow investors to invest in large scale investments, which they might not be able to do otherwise, real estate mutual funds to allow such an advantage. Small investors who may not have a large amount of capital to invest directly in real estate can benefit from real estate funds which will allow them to earn a part of the profits made by large-scale commercial real estate like skyscrapers or corporate office parks. In addition to the aforementioned, REMFs also provide investors with the benefit of having their investment managed professionally by qualified personnel / fund managers while also allowing for diversification of the investor’s portfolio.
Advantages of Mutual Funds
Real estate mutual funds have several benefits to offer. Here are some of the notable ones.
- Flexibility To Invest – Real estate mutual funds are one of the most beneficial funds to invest in as they offer great flexibility to investors. In making an REMF investment, investors have the choice to invest as per their financial goals and the amount of income which they may have available at that time to invest. .
- Benefit of Professional Portfolio Management – Just like mutual funds, real estate mutual funds are also managed by experienced and qualified professionals (fund managers) who manage the investor’s fund. The fund manager will carry out extensive research with regards to the company where your money must be invested. He will ensure that the investment is done keeping in mind the investor’s financial goal and will yield returns accordingly to fulfill the same.
- Serve A Dual Purpose - Real estate funds have been designed to offer dual benefit. For medium to long term REMF investors, not only do real estate funds allow for appreciation of invested funds but also provide dividend income.
- Affordable Alternative For Purchasing Investment Property – Property is one of the most profitable investments, which continued to yield high returns consistently. However, with sky-high property prices, investing in property isn’t always possible. Real estate mutual funds offer are a great alternative to purchasing investment property. They are especially helpful in levelling not only the risk involved but also are a viable option for investors who wish to limit their investment and also lower their involvement in management of the fund.
- Diversifying Investor’s Portfolio - Real estate mutual funds are a great option for investors who wish to diversify their investment portfolio. These funds allow investors, who have only a limited amount of capital available, to invest in focused or diversified real estate investments where the investment required is low.
- Protection From Inflation - Real estate mutual funds may also serve to protect the investment from inflation. During bouts of inflation, prices of property and rent rise, which in turn can lead to a rise in the value of real estate as well.
- Offer Easy Liquidity – Unlike real estate, which offers very low liquidity to an individual’s investment, real estate mutual funds offer high liquidity to your investment. Similar to mutual funds which can be redeemed in a short period of a day or 2, real estate mutual funds can also be traded in a day.
- Lend Stability To Portfolio – One of the most important benefits offered by real estate funds is stability. If you are looking for a fund to balance out the high-risk investments in your portfolio, real estate funds are a great option. While real estate prices may tend to be unpredictable at times, the resultant negativity does not percolate down to real estate funds.
Disadvantages of Investing in Real Estate Mutual Funds
While real estate mutual funds do have plenty of benefits to offer, they are not entirely without flaws. Here are some of the common risks associated with real estate funds.
- Interest Rate Risk - Real estate mutual funds are not entirely isolated from the effects of interest rate changes. The returns on real estate funds Rising interest rates can also affect the returns of real estate funds.
- Market Risk – Real estate funds are not entirely isolated from market related risks. This implies that just like real estate funds will perform well in times when the real estate market is booming, in the same way, real estate funds will be affected as a result of any drops in the real estate market.
- No Say In The Allocation of Funds – Another risk which accompanies investing in real estate funds is that investors will not have the liberty to decide which companies their funds will be invested in or have any say in how the fund is being run. Also, investors will not have any voting privileges when it comes to issues regarding the fund, a privilege which is allowed to investors who own stocks in a company.
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
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