Real estate is an asset class that tends to perform well over long periods of time. But unfortunately, buying real estate is not easy. Most people spend their entire lifetimes trying to have one property that they live in. Buying more real estate as an investment is something only the very rich can afford to do. Thankfully, for the rest of us, there are real estate mutual funds that we can invest in.
What are real estate funds?
Real estate funds are mutual funds in which the fund manager builds a portfolio of diversified real estate holdings. They invest in commercial and residential, rental or ownership properties on behalf of their investors.
When it comes to investing in property, real estate funds can either invest directly or indirectly via Real Estate Investment Trusts (REITs). Furthermore, these funds can invest nationally, internationally or both, depending on the real estate scenario.
Who should invest in real estate funds?
Alike most of the mutual funds, real estate funds provide many benefits such as portfolio management by professionals and diversification to mitigate risks. Investors who wish to gain from appreciation in the real estate sector can invest in these funds, more so when they don’t have the capital to invest in real estate directly. Using a real estate mutual fund, they can participate in the sector through smaller amounts. Real estate funds also allow them to diversify across properties, whereas direct real estate investments would allow the purchase of one or two properties only.
What are the risks associated with real estate funds?
A few risks that can be a deal breaker for real estate funds are:
- Liquidity risk: When a property ceases to generate returns in the market, liquidity risk comes into the picture.
- Market risk: Market risk is associated with factors such as recession, natural calamities, etc. which hold a significant impact on the performance of real estate properties. Both liquidity and market risk have a huge impact on growth-oriented funds because the appreciation in properties will only lead to their sale if market demand is there.
- Interest risk: When there are fluctuations in the interest rates, it affects the valuations of properties and real estate developers.
How do real estate funds compare to other funds?
Real estate funds are meant for those individuals who have little knowledge to purchase land/property on their own and have to rely on portfolio experts to invest in this industry. There are many categories of mutual funds that can yield consistent returns when compared to real estate funds. Real estate fund options are also very few.
Overall, if an investor is looking to build wealth over the long-term, they should opt for equity mutual funds instead of real estate funds. Equity mutual funds are more tax-efficient than real estate funds and also benefit from the real estate sector by investing in infrastructure and construction companies. Hence, for most lay investors, real estate funds don’t make a lot of sense.