For many of us, owning a house is a dream. However, with real estate prices going through the roof, owning a house remains a dream for many. This should discourage you from investing in the real estate market and make the most of this growth. There are many alternatives to investing in a house or a piece of land or house. One of the most popular alternatives is real estate mutual funds. In this article, we cover real estate mutual funds, its features, advantages and risks in detail.
Real estate mutual funds are sectoral funds that primarily invest in securities of real estate companies or in Real Estate Investment Trusts (REITs). The fund manager pools money from investors and invests in these companies. So technically, the fund manager is providing the real estate companies with capital to build and develop properties. When the share price of these companies rises, or when the real estate market goes up, the mutual fund will make a profit.
Following are the features of real estate mutual funds.
Real estate mutual funds are similar to other equity mutual funds. The manager pools money from different investors with similar objectives and invests them in REITs and shares of real estate companies. The profits arising from the REITs are distributed to all mutual fund unit holders, whereas the capital appreciation in the shares of the real estate companies will increase your portfolio returns.
Real estate mutual funds best suit small investors who lack the capital to invest in real estate properties. Since the investment in real estate mutual funds is low, it is accessible to everyone. These funds also suit investors who want to gain from the real estate market boom. If you are looking to accumulate wealth from real estate, these are your go-to funds.
Real estate funds ideally reap good returns in the long term. So, if you have a horizon of 5 years, then you can consider investing in these funds. They also help in diversifying your investment portfolio. If you want to beat inflation and protect your portfolio from downside risk, then real estate funds can be considered for investment. Finally, if you want to escape from the hassle of paperwork and eliminate the risk of litigation, then real estate mutual funds are the best fit for you.
The following are the advantages of real estate mutual funds:
The income and capital gains you generate from real estate mutual funds are taxable as per the Income Tax Act of 1961. Following are the tax rules for real estate mutual funds.
REITs and real estate mutual funds help participate in the real estate market. However, the similarity ends there. REITs and real estate mutual funds are two completely different investment vehicles. Below are some of the major differences between them.
Real estate mutual funds are similar to mutual funds, where it invests in shares of real estate companies. In contrast, REITs invest in mortgages, constructed properties, or under-construction properties.
Through REITs, you can directly participate in the real estate market and earn returns; however, in the case of real estate mutual funds, you participate indirectly through the shares of real estate companies.
Real estate mutual funds earn returns when the shares of underlying companies go up, whereas REITs earn income when the underlying properties earn rent, which is distributed to the investors in the form of dividends. So, if you want to earn passive income or short-term profit, REITs are a better choice. However, if you want to accumulate long-term wealth through capital appreciation, then real estate mutual funds should be your go-to choice.
You can invest in real estate mutual funds through a demat account or directly through the fund house’s website. However, you can only invest in REITs through a demat account as REITs trade on the stock exchange just like shares.
There are no subcategories of real estate mutual funds. However, in the case of REITs, there are three kinds, namely equity, mortgage, and hybrid. Equity REITs own and manage properties and earn rent through them. Mortgage REITs deal with mortgaged properties and earn through interest on mortgages. Lastly, hybrid REITs deal with both owned and mortgaged properties and earn through rent and interest on mortgages.
Real estate mutual funds allow you to invest in shares of real estate companies, which provide diversification to your portfolio. Moreover, real estate mutual funds help fight against inflation as real estate prices go up during inflation, which positively impacts the shares of real estate companies.
A real estate mutual fund pools money from investors and invests in shares of real estate companies and REITs. Investors can earn from the capital appreciation of shares and dividend income of REITs. You can invest in real estate mutual funds through a demat account, directly through the company’s website, or any third-party platform such as Jupiter Money.
Investors who want to benefit from the real estate market boom can invest in real estate mutual funds. These funds also suit investors who want to diversify their investment portfolio. Moreover, investors who want to accumulate wealth in the long term and fight inflation can also consider investing in real estate mutual funds.
Since the minimum investment in real estate mutual funds is low, small investors who can’t afford to buy real estate properties can invest in these funds.
You can invest in real estate mutual funds through SIP if you want to participate in the real estate market. You can directly invest from the company’s website or go through a third party’s website to start a SIP in real estate mutual funds.
REITs are listed on the stock exchange, and you can invest in them directly through your demat account. Alternatively, you can participate in a REIT IPO when it is first issued. You can also invest in REIT through real estate mutual funds. However, these funds also invest in shares of real estate companies and not just REITs.
A real estate fund helps you participate in the real estate market; Given the current real estate boom, you can make good profits from these funds if you choose to invest in them. Moreover, real estate funds help diversify your investment portfolio and also accumulate long-term wealth. They also help fight inflation and provide stability to your investment portfolio.