Real Estate Mutual Funds – Advantages and Disadvantages

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Not everyone can afford to invest in real estate and generate a stable income, as investing in real estate means investing in multifamily projects, investment trusts, and other big properties, which automatically means if you want to invest in real estate, you need a huge amount of money.

So, for low-budget investors, Real estate mutual funds (REMFs) are the budget-friendly alternative to make their way into the real estate sector.

Moreover, according to real estate mutual funds India experts, this sector’s growth looks promising in the coming decade. So, investing in the real estate sector will be a decent decision.

What are mutual funds?

Private companies or Government companies hand investors a stake in their assets in the form of shares or bonds, which are tradable financial assets. These shares or bonds are the securities that a company offers its investors.

A mutual fund is nothing but when more than one or multiple investors pool their money to purchase such shares and bonds.

What are real estate mutual funds (REMFs)?

A type of sector fund that invests mainly in shares (securities) provided by the corporations that invest in real estate developments is called a real estate mutual fund. It is essentially the fund that provides capital to a corporation that works in real estate developments for the development of buildings.

Aside from this, these funds are invested in corporate and commercial properties, agricultural land, and residential complexes.

You can either invest directly in companies or REITs (Real estate investment trusts); thereby, you can invest a minimum amount in an asset through real estate mutual funds (REMFs) instead of spending a huge amount of money on the entire property.

The sector’s growth determines the ROI (return on investment), and the investors benefit from the development and sale of assets.

Difference between real estate and mutual funds

Investing in real estate is always considered a great investment because of the financial commitment it provides. Therefore, so many people save money to buy new properties. However, those people don’t know what type of investment is best for them, a mutual fund or real estate.

Below are some points by which you can decide what is better for you:

1. Liquidity-

An asset is liquid when you can sell it whenever you want to. When it comes to liquidity, investments in mutual funds are extremely liquid because you redeem the units whenever you want, and you will receive the money in 2-3 business days. However, the case is not the same when it comes to real estate investments. Properties are not bought and sold within a few days; it takes a long time to find a new buyer and sell the property at a fair price.

2. Returns- 

No matter where you are investing, the first thing you look for is the returns you get from the investment. Based on the published reports of some real estate research firms, the return has been 10 percent of the average 10-year real estate investment. However, regarding mutual fund returns from the past decade, the returns fluctuated between 12 percent and 14 percent. Some schemes have given returns even more than this.

3. The amount of investment needed-

For investing in real estate property, you need a huge amount of money depending on the area of the property. It can be 50 lakhs or more. Sometimes it can be more than a crore. On the other hand, you can start a SIP in a mutual fund where you have to invest a specific amount of money every month. You can start by investing 500 a month.

4. Risk-

The main motto of equity mutual funds is to minimize the risk and maximize the returns. The managers investing your money will create a portfolio of different stocks to reduce the risk. On the other hand, the risk involved in real estate investments can be much higher during an economic slowdown. 

Advantages of investing in real estate funds (REMFs)

The advantages of investing in real estate mutual funds are listed below-

  1. These funds are flexible. So, they are a cost-effective alternative for real estate investment. There is no limit to the amount of money you can invest.
  2. It is a great substitute for purchasing real estate property. You can invest in a real estate mutual fund that invests your amount in different real estate companies and assets.
  3. Real estate mutual funds are highly liquid because you can buy or sell the funds units whenever you want to.
  4. These funds provide protection against inflation. Due to inflation, the value and the rent of the property increase, thereby increasing the fund’s units as well as protecting against inflation.
  5. Real estate mutual funds are managed by professionals. They make sure that investors don’t have to worry about additional risks.
  6. You can invest directly into real estate assets through REIT mutual funds in India.

Disadvantages of investing in real estate mutual funds

Although there are numerous advantages of investing in REMFs, you need to be aware of some of its disadvantages as well. They are listed below-

  1. The fund managers manage investment in real estate mutual funds. So, an investor is completely unaware of where his/her money is invested.
  2. Although REMFs have low risk, real estate trends may change and affect investment.
  3. Real estate mutual funds involve interest rate risk, which means it affects the real estate prices and borrowing rates. Investors need to refrain from investing when the borrowing rates are higher.
  4. There is a fluctuation in real estate prices. It depends on market demand and supply. Sometimes the funds will generate satisfying returns and sometimes dissatisfying depending on the overall performance of the market.

Bottomline

Real estate mutual funds offer better returns as the funds are liquid. It is well suited for those people who have a good amount of knowledge of this sector and are running out of money for huge investments like purchasing a property. REIT mutual funds are a great way through which you can purchase assets. However, like any other investment, a real estate mutual fund also comes with certain types of risks and rewards. Therefore, you need to consider every little aspect before investing.