A real estate mutual fund is a type of investment which is made up of securities including stocks of companies that purchase real estate. A large part of these funds goes into investment in commercial and corporate properties , residential complexes and agricultural land. REMFs can invest in property,directly or indirectly via Real Estate Investment Trusts (REITS)
Best Suited For
Real Estate Mutual Funds are favourable to small investors who are not able to invest in real estate directly. Such investors can participate in the sector through smaller amounts and can be rewarded with good returns as these funds are managed by professionals and experts. Real estate funds also allow them to diversify across properties whereas direct real estate investments will allow the purchase of one or two properties only.
It is important to note that the overall returns of this investment is dependent on factors like condition of the real estate market, interest rates supply and demand of residential and commercial spaces etc.
Benefits of Investing in Real Estate Mutual Funds
Here are some of the reasons investing in real estate mutual funds could prove fruitful:-
1. Flexibility to Invest – They offer great flexibility to investors as they have the choice to invest depending their financial goals and the amount of income available to invest
2. Alternative to Purchasing Property – Real estate mutual funds allows a small investor an alternative to purchase investment property and also lower the involvement in management of the fund.
3. Diversification of 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. Residential, commercial and rental projects are part of the investment portfolio.
4. High Liquidity – Investment in real estate offers low liquidity since reselling a property might not be very easy. On the other hand investing in real estate mutual funds can help you get higher gains when the market is up and you can liquidate your funds whenever you want.
5. Portfolio Stability– This fund balances out the high-risk investments in the portfolio . Although the real estate prices may fluctuate at times this does not affect real estate funds to a large extent.
6. Protection Against Inflation–During inflation prices of property and rent increase which can lead to a rise in the value of real estate as well , which in turn can increase the value of real estate mutual fund units.
Investment Associated Risks
Like every investment, real estate mutual funds are not immune to risks. Two major risks are associated with investment in the real estate mutual funds:-
1. Market Risk – In a positive market the real estate funds will perform well but a crisis in real estate sector will affect the real estate mutual fund as well.
2. Interest Rate risk – Rising interest rates affect the overall returns of the real estate mutual funds
One disadvantage associated with this investment is that the investors do not have rights to decide how the fund should be run or in which company their funds should be invested in. Investors which own stocks in a company have a say in issues of this sort but the same does not hold true for real estate fund investors.
Real Estate Mutual funds are low involvement – high liquidity investments fetching steady returns over a period of time. With minimal effort and management of funds by experts these funds become an area of interest for investors who don’t want to invest directly and have low budget for investment. Therefore, an investor who is aware of the real estate sector and the overall growth of the economy can benefit a lot out of real estate mutual funds.