Should You Invest in a Commercial Real Estate Mutual Fund?

By Published On: November 18, 20213.3 min read

A mutual fund is a collective investment tool that pools together money from many investors. After some amount of research, professional managers then invest these funds into various companies.

Real estate investment trusts (REITs) and real estate operating companies (REOCs) are the direct investments of commercial real estate mutual funds. Real estate mutual funds allow you to get diversified real estate exposure while investing a tiny amount of money. They provide investors with a considerably more extensive asset selection than buying individual REIT shares, and they come with the prospect of lower transaction fees and commissions, depending on their strategy and diversification aims.

Other benefits of mutual funds for retail investors include, the fund’s analytical and research information on purchased assets, as well as management’s views on the viability and performance of certain real estate investments and asset classes. A family of real estate mutual funds can attract more investors by strategically overlaying specific property types or areas to enhance returns.

What Is the Difference Between Real Estate Mutual Funds and Real Estate Investment Trusts?

Real estate mutual funds usually rise in value via appreciation and generally do not give short-term income to investors, as do REITs. Real estate funds acquire value primarily through a rise in the value of the assets. These funds provide diversity across different property sectors and locations, compared to a single REIT asset that may not give that degree of diversification.

A real estate mutual fund can invest in REITs as well as fundamental estate-oriented equities. These funds are more diverse and less likely to concentrate on a single industry, such as data centers. The funds are designed for long-term investment strategies and are focused on capital appreciation. REITs, on the other hand, are frequently utilized to generate income.

How Do Mutual Funds Work?

Since mutual funds allow an individual to take part in the stock market without monitoring its movement regularly, the fund manager takes your money and invests in a wide range of stock and fixed-income investments. Through diversification, it is possible to counter market fluctuations and minimize risk. So, if a specific group of companies in a portfolio does not do too well at a given moment, there is potential that the loss is balanced or mitigated by better-performing equities in that portfolio.

Advantages of Investing in Real Estate Mutual Funds

The advantages of investing in real estate mutual funds include:

  1. Professional real estate investment management
  2. Increased diversification
  3. Liquidity at any time
  4. Ability to partake in investments that may be available only to larger or institutional investors
  5. Tax benefit: Mutual funds are not liable to be taxed on the income they earn

Disadvantages of Real Estate Mutual Funds

The major disadvantages of investing in a real estate mutual fund include:

  1. Lack of portfolio customization: The investor does not have control over what is bought or sold. Decisions are entirely based on the fund manager, in line with your scheme’s investment objective.
  2. No guaranteed return: A mutual fund is not a guaranteed return product. The progress of the specific market where the money is invested and the performance of individual securities influence the performance of the scheme. This implies a market link risk.

Example of a Real Estate Trust Fund

When you create a trust, you determine how the assets in your trust will be used and when they will be dispersed. For example, you may want to use the real estate assets in your trust to jump-start your child’s career when they are 24, supplement their retirement when they are 60, pay college tuition for your grandchildren or provide annual scholarships to your community. Your appointed fund manager will be saddled with the responsibility of making sure that everything is managed according to your intentions.

Remember the End Goal

The goal of a commercial real estate mutual fund is to achieve diversification in stock investment. It’s important to understand REITs and mutual funds well, examining their pros and cons, and also deciding on which one best suits your investment interests.

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