Real Estate Mutual Funds : Advantages and Risks

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What are Real Estate Mutual Funds?

A Real Estate Mutual Fund is a type of Sector Fund that invests primarily in securities issued by corporations that invest in real estate developments. In essence, it is a fund that offers capital and investment to a real estate corporation for the purpose of developing buildings. Also, the funds invest in commercial and corporate properties, residential complexes, and agricultural land.

Indicative returns of 10-12% annually

Investment horizon of 5+ Years

No lock-in

Long term goals such as retirement or building your wealth

Parag Parikh Flexi Cap fund (G)

HDFC Large and Mid Cap Fund (G)

ICICI Prudential Value Discovery Fund (G)

ICICI Prudential Bluechip Fund (G)

These funds are professionally managed and invest mainly in the equities of real estate developers. Return on investment is contingent upon the sector’s growth, with investors benefiting from the sale and development of assets.

This Fund may invest directly in real estate companies or indirectly through Real Estate Investment Trusts (REIT). The fund manager has an option to choose between the two based on the investment objective.

Features of Real Estate Mutual Funds

Following are the key features of real funds:

Long-term Investment: These funds are long term investment options. Developing and selling properties take time. Hence, these funds can generate significant returns only in the long term.
Liquidity: They are comparatively more liquid than physical real estate. Thus, you can buy and sell the fund units anytime.
Risk: These fund investments are subject to a set of risks. These funds have a low chance of falling for fraudulent builders or fake property. However, the segment is still at risk of collapsing. Due to the fund’s sector focus, any changes in overall real estate trends may affect the investment.
Returns: They have the potential to generate significant returns in the long term. Though the returns are dependent on the sector’s growth, most funds are known to provide positive returns.
Profit-Sharing: Investors in REITs often receive a part of the company’s profits. On the other hand, investment in real estate companies offers the potential for long-term growth.
Minimal Effort: This significantly reduces the amount of effort necessary to acquire a property.
Diverse Portfolios: The majority of These funds invest in a variety of property types, with an emphasis on residential, commercial, rental, hospitality and agricultural properties. This essentially offers investors the opportunity to benefit from growth across multiple segments.
Low Investment: Purchasing a home is sometimes out of reach for the majority of people, owing to ever-increasing costs. This fund enables individuals to participate in this sector without paying high fees. Individuals may invest any amount they see appropriate.
Fees: These funds charge management and a one-time fee equal to a fixed percentage of the investment amount.

Advantages of Investing in Real Estate Funds

Following are the advantages of investing in real estate funds:

Flexibility: These Funds are a cost-effective option for investing in real estate. With these funds, you have the option of investing any amount.
Alternate to Physical Real Estate: These funds are an excellent substitute for purchasing an investment property. Rather than investing in a physical asset, you can invest in this fund that invests across a basket of real estate companies and assets.
Protection Against Inflation: With inflation, property values and rents increase. This increases the value of the fund’s units. As a result, these funds provide excellent protection against inflation.
Liquidity: Real estate investments are not liquid investments. Buying and selling real estate is time-consuming. But with these funds, liquidity is not a problem. You can easily buy and sell the fund units anytime.
Stability: When you invest in real estate, if prices in your neighbourhood fall for any reason, you may experience losses. However, this volatility is mitigated with real estate funds because the fund invests in a diverse portfolio of assets across geographies.
Diversification: Real estate funds invest across different assets like commercial, rental, hospitality and agricultural properties. Thus, you get exposure to multiple assets by investing in one fund.
Less Time Consuming: Purchasing real estate may be a lengthy and time-consuming process. However, real estate funds are an excellent alternative to purchasing real estate directly. It not only reduces the risk of purchasing a property that is entangled in litigation but also gives returns without the expense of property maintenance.
Professional Fund Management: Professional fund managers oversee the fund, guaranteeing that investors bear no additional risk. One can enjoy the benefits without worrying about paperwork, legal status, or anything else.

Risks of Investing in Real Estate Funds

Following are the disadvantages of investing in real estate funds:

Investment Decision: Typically, investments in real estate funds are managed by fund managers, which means that an investor has no direct say over where the money is invested. Investors do not own any shares in the company and have no voting rights. Additionally, they have no control over which property investment is made.
Interest Rate Risk: Interest rates significantly impact real estate prices. In other words, interest rates impact the borrowing rates. Thus, investors tend to hold off from investing in real estate when the borrowing rates are higher.
Market Risk: Real estate prices fluctuate on the basis of market demand and supply. The real estate funds will generate significant returns when the markets are doing well. However, the fund’s returns may be lower in a sluggish scenario.

Who Should Invest in Real Estate Funds?

Real estate mutual funds have gained popularity among investors who do not wish to invest directly and have a limited investment budget. Investors can gain exposure to the sector with modest investments and earn relatively attractive returns. Since professionals and specialists manage the funds, you do not have to worry about selecting and managing assets.

Furthermore, these funds are a good investment for portfolio diversification. Direct real estate investments restrict your investments to one or two assets. With these funds, you get to invest across a basket of real estate securities.

Since these are sector funds, they are risky. Like other investments, these funds are exposed to market risks, interest rate risks, supply and demand of spaces, etc. Thus, it is critical to keep in mind the potential risks before investing in the fund.

These funds are suitable for investors who are knowledgeable about the real estate sector and the economy.

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