What is a real estate fund?

Investing in real estate has been the most-acclaimed way of generating wealth around the world. The prices of real estate properties are high enough to deter most investors. For those who believe that this sector will undergo growth in the near future and they want to invest in it, then the Real Estate Mutual Funds are an ideal option. 

Real Estate Funds are sector funds that invest in securities of companies from the real estate sector. These funds provide the capital to the real estate company to develop a property. If the sector grows, then the fund makes good returns. A real estate fund might invest in real estate companies or REITs (Real Estate Investment Trusts) based on the investment objective of the fund among other factors.

Who should invest?

Usually, investors without sufficient funds to purchase a property opt for real estate mutual funds. This investment requires a horizon of at least three to five years, hence not recommended to short-term investors. One needs to be aware of how the real estate sector functions to benefit from this investment.

Advantages 

• Real Estate Investment Funds allows to invest in the real estate sector without burning a hole in the pocket. One can have the flexibility to choose the amount that one wants to invest.
• These funds offer a great alternative to buying an investment property. It offers benefit from the growth of the real estate sector without buying a property.
• These funds remain diversified and are a blessing for investors with limited available capital who want to gain exposure to the real estate sector.
• When an investment is made in a real estate property, it has very low liquidity since selling the property takes time. This is where REFs offer an advantage as they are highly liquid and allow to liquidate investments when the markets are high.
• If the property investment faces a downturn in prices in a locality for any reason, then losses are inevitable. With REFs, these fluctuations are balanced out and stability is gained since the fund invests in multiple properties spread across different areas.
• When an economy goes through inflation, the prices of property rise and the rents increase too. This leads to an increase in the value of the units of a real estate fund. These funds are great protection against inflation.

Risks associated with investing in Real Estate Funds

Market Risk

The real estate market is highly dependent on the demand for properties-rental as well as for outright purchase. Hence, if the markets are doing well, then the fund will offer good returns. In a sluggish market, the fund’s performance will suffer too.

Interest Rate Risk

The interest rate regime affects the real estate market since it has a direct impact on borrowing rates.

Features 

1. Investment horizon – These funds are recommended to investors with a long-term investment horizon.
2. Hassle-free real estate investing – Purchasing a property is a time-consuming process. Home buyers are required to go through an arduous process before getting the property registered in their name. With real estate funds, one can leave all this hassle to professional fund managers and benefit from the performance of the overall sector.
3. Diversification – Most real estate funds invest across the entire gamut of properties like residential, commercial, industrial, etc. This allows to benefit from the growth in various sub-sectors.

Minimal investment – With property’s sky-rocketing prices, most investors find it difficult to purchase a property. These funds allow to include real estate as an asset class in investment portfolio without having to pay exorbitant amounts.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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