In recent years, alternative investments have become increasingly popular among Indian investors. One of the most appealing asset classes in this category is real estate funds. These funds offer an opportunity to invest in real estate without directly purchasing property, making them a suitable choice for individuals looking to diversify their investment portfolios.
In this article we will understand the real estate fund meaning, along with its advantages and benefits.
Table of contents
What is real estate fund?
A real estate fund is an investment fund that combines together money from multiple investors and invests that money in a portfolio of real estate assets, including residential and commercial properties and more.
Real estate funds can be a suitable way for investors to get exposure to the real estate asset class without the headache of managing properties. The funds are managed by professional asset managers who make all the investment decisions on behalf of investors.
Key traits and benefits of investing in real estate funds
Let’s explore the key features of real estate funds and the advantages of real estate fund investments:
- Diversification: These funds usually diversify their portfolio into different properties in multiple sectors, which is usually residential, commercial, and industrial. Diversification helps spread the risk across different classes of real estate assets.
- Passive investment: Unlike direct property investments, these funds allow investors to get involved in the real estate space without the burden of maintenance and responsibilities. Funds are handled by fund managers who know the market very well.
- Liquidity: Real estate investments are usually very illiquid. However, real estate funds offer some liquidity, especially when invested via mutual fund schemes, significantly more so than direct investment.
Who should invest in real estate funds?
Real estate funds can be suitable for a wide range of investors, but they are particularly beneficial for individuals who:
- Are looking for exposure to real estate but don’t want to manage properties directly.
- Want to diversify their investment portfolio by adding an asset class that isn’t closely correlated with stocks and bonds.
- Prefer passive investments, leaving the day-to-day management to professionals.
- Have a medium to long-term investment horizon and are comfortable with moderate risk.
Read Also: Real Estate vs. Mutual Fund: Key Differences and Which is Better?
Potential risks to consider
While real estate funds offer numerous benefits, they also come with risks that investors need to be aware of:
- Liquidity risk: While these funds are generally more liquid than direct real estate investments, liquidity can still be a concern, especially in the case of closed-end funds or funds with longer lock-in periods.
- Market fluctuations: The value of real estate investments can be affected by economic conditions, interest rates, and local market dynamics. A downturn in the real estate market can impact the returns of real estate funds.
- Regulatory risk: Changes in government regulations, such as property laws, taxation, or development policies, can also influence the performance of real estate funds.
How do real estate funds compare to REITs?
Many investors often confuse real estate funds with Real Estate Investment Trusts (REITs), but they are different investment products. Here’s a quick comparison:
| Feature |
Real estate funds |
REITs |
|---|
| Investment type |
Real estate related instruments |
Direct commercial property |
| Liquidity |
Moderate liquidity depending on the fund type |
High liquidity due to public trading |
| Risk level |
Varies with the underlying assets |
Generally lower risk, as they are diversified |
| Income generation |
Irregular or capital-gain oriented |
Regular (via dividends) |
Read Also: Infrastructure Mutual Funds - Meaning, Types, Advantages
Conclusion
Real estate funds can be helpful for investor portfolios to offer diversification, passive income and exposure to real estate without direct involvement in property ownership. However, as with all investment vehicles, it is important to do your due diligence, obtain the necessary information on involved risks and speak with your financial advisor before investing.
For those already familiar with mutual funds, real estate funds are very much like a type of equity fund that provides real estate exposure. Real estate funds can be included as part of overall asset allocation strategy in conjunction with other traditional asset classes, such as stocks and bonds.
FAQs:
What is the best real estate mutual fund to buy?
The best real estate mutual fund for you will depend on your risk tolerance, investment objectives, and time horizon.
Is a real estate fund a REIT?
Although real estate funds or equity real estate funds invest primarily in real estate, they are not REITs. Real estate funds can invest in different types of real estate assets including REITs but aren't limited to those.
Which is the best real estate mutual fund?
Like any investment, choosing a suitable real estate mutual fund is based on fees, returns and the underlying portfolio of assets.
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