Real Estate Mutual Funds

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 15, 2024

Get Any Financial Question Answered

Definition of Real Estate Mutual Funds

Real estate mutual funds are a type of mutual fund that invests in real estate-related assets, such as properties, REITs, and MBS.

These funds aim to provide investors with exposure to the real estate market and its potential for capital appreciation and income generation.

Real estate mutual funds are regulated by the Securities and Exchange Commission (SEC) and are subject to the same rules as other mutual funds.

Real estate mutual funds have been around for several decades, with the first fund launched in 1960 by the National Association of Real Estate Investment Trusts (NAREIT).

The fund, known as the First REIT, invested in a diversified portfolio of REITs and became popular with investors looking for exposure to the real estate market.

Since then, many other real estate mutual funds have been launched, offering investors a variety of investment options.

Real estate mutual funds offer several advantages to investors, such as diversification, professional management, liquidity, low minimum investment, and tax benefits.

These funds also provide access to the real estate market, which can provide capital appreciation and income potential.

Real estate mutual funds can be a suitable investment option for investors seeking exposure to the real estate market without the hassle of owning and managing properties themselves.

Types of Real Estate Mutual Funds

Real estate mutual funds can be classified into three main types: equity real estate mutual funds, mortgage real estate mutual funds, and hybrid real estate mutual funds. Each type has a different investment objective and portfolio composition.

Equity Real Estate Mutual Funds

Equity real estate mutual funds invest primarily in companies engaged in the ownership, development, and management of real estate properties.

These companies can be REITs or non-REITs and can operate in various sectors, such as residential, commercial, and industrial properties.

Equity real estate mutual funds aim to provide investors with capital appreciation by investing in companies with the potential for growth and value creation.

Mortgage Real Estate Mutual Funds

Mortgage real estate mutual funds invest primarily in mortgage-backed securities (MBS), which are bonds backed by pools of mortgages.

These funds aim to provide investors with income through the interest payments generated by the underlying mortgages.

Mortgage real estate mutual funds can be invested in various types of mortgages, such as residential and commercial mortgages, and can have different risk profiles depending on the quality of the underlying mortgages.

Hybrid Real Estate Mutual Funds

Hybrid real estate mutual funds invest in a combination of equity and mortgage real estate securities, aiming to provide investors with both capital appreciation and income generation.

These funds can be invested in a variety of real estate-related assets, such as REITs, MBS, and real estate operating companies. Hybrid real estate mutual funds can offer a diversified portfolio with exposure to different sectors and types of real estate.

Advantages of Real Estate Mutual Funds

Real estate mutual funds offer several advantages to investors, such as diversification, professional management, liquidity, low minimum investment, and tax benefits.

Diversification

Real estate mutual funds provide investors with exposure to a diversified portfolio of real estate-related assets, which can help reduce the risk of loss from any one particular investment.

By investing in multiple types of real estate, such as residential, commercial, and industrial properties, as well as REITs and MBS, real estate mutual funds can spread risk and potentially increase returns.

Professional Management

Real estate mutual funds are managed by professional investment managers who have expertise in real estate markets and can make informed investment decisions on behalf of investors.

These managers can analyze market trends, evaluate investment opportunities, and manage risk to maximize returns for investors.

Liquidity

Real estate mutual funds are generally more liquid than direct real estate investments, allowing investors to buy and sell shares on a daily basis.

This liquidity makes it easier for investors to enter and exit positions in real estate mutual funds, without the hassle of owning and managing properties themselves.

Low Minimum Investment

Real estate mutual funds typically have lower minimum investment requirements compared to direct real estate investments.

This allows investors with limited capital to participate in the real estate market and potentially benefit from the returns generated by real estate investments.

Tax Benefits

Real estate mutual funds can provide tax benefits to investors, such as tax-deferred income, capital gains, and deductions.

For example, REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which can be taxed at a lower rate than ordinary income.

Risks of Real Estate Mutual Funds

Real estate mutual funds also carry certain risks that investors should be aware of, such as market risk, interest rate risk, liquidity risk, and credit risk.

Market Risk

Real estate mutual funds are subject to market risk, which is the risk of loss due to fluctuations in the real estate market. Changes in economic conditions, such as recessions or market downturns, can negatively impact the performance of real estate mutual funds.

Interest Rate Risk

Real estate mutual funds are also subject to interest rate risk, which is the risk of loss due to changes in interest rates.

Rising interest rates can negatively impact the performance of real estate mutual funds, as they can increase the cost of borrowing and reduce the demand for real estate investments.

Liquidity Risk

Real estate mutual funds are subject to liquidity risk, which is the risk of loss due to the inability to sell assets quickly enough to meet investor redemptions.

If a real estate mutual fund experiences large redemptions, it may need to sell assets quickly, potentially at a loss, to meet the demands of investors.

Credit Risk

Real estate mutual funds are also subject to credit risk, which is the risk of loss due to the failure of borrowers to repay their debts. If the underlying mortgages or loans held by real estate mutual funds default, it can negatively impact the performance of the funds.

Advantages and Risks of Real Estate Mutual Funds

Performance of Real Estate Mutual Funds

Real estate mutual funds can perform differently depending on market conditions, investment strategies, and portfolio composition.

Comparison With Other Investment Options

Real estate mutual funds can offer attractive returns compared to other investment options, such as stocks, bonds, and cash.

Over the long term, real estate has historically provided higher returns than stocks and bonds, and can provide inflation protection and income potential.

Factors Affecting Performance

Several factors can affect the performance of real estate mutual funds, such as the quality of the underlying real estate assets, the management strategy of the fund, and market conditions.

Real estate mutual funds that invest in high-quality assets and have a sound investment strategy can potentially generate higher returns.

Measuring Performance

The performance of real estate mutual funds can be measured using various metrics, such as total return, net asset value (NAV), and expense ratio.

Total return measures the change in the value of the fund's shares over a period of time, including dividends and capital gains.

NAV represents the value of the fund's assets minus its liabilities, divided by the number of outstanding shares.

Expense ratio represents the costs associated with managing the fund, such as management fees, operating expenses, and other fees, as a percentage of the fund's assets.

How to Invest in Real Estate Mutual Funds

Investing in real estate mutual funds requires careful consideration of several factors, such as the types of investment accounts available, the right real estate mutual fund to invest in, and investment strategies.

Types of Investment Accounts

Real estate mutual funds can be held in various types of investment accounts, such as individual retirement accounts (IRAs), 401(k)s, and brokerage accounts.

Each type of account has its own tax advantages, contribution limits, and withdrawal rules, so it is important to choose the right account for your investment goals.

Choosing the Right Real Estate Mutual Fund

Investors should consider several factors when choosing a real estate mutual fund, such as the fund's investment strategy, portfolio composition, management team, historical performance, and fees.

It is important to conduct thorough research and analysis before making an investment decision.

Investment Strategies

There are several investment strategies that investors can use when investing in real estate mutual funds, such as active management, passive management, and tactical asset allocation.

Active management involves making investment decisions based on market conditions and individual securities, while passive management involves investing in a portfolio that mirrors an index or benchmark.

Tactical asset allocation involves adjusting the allocation of assets based on market trends and conditions.

Conclusion

Real estate mutual funds can offer attractive investment opportunities for investors looking to diversify their portfolios and potentially benefit from the returns generated by real estate investments.

While real estate mutual funds offer several advantages, such as diversification, professional management, liquidity, low minimum investment, and tax benefits, they also carry certain risks, such as market risk, interest rate risk, liquidity risk, and credit risk.

By carefully considering the types of real estate mutual funds available, their advantages and risks, and the strategies for investing in them, investors can make informed investment decisions that align with their investment goals and risk tolerance.

Real Estate Mutual Funds FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

Discover Wealth Management Solutions Near You