Even novice investors know that the key to investing is ensuring you’re not putting all your eggs in one basket.
Diversifying your portfolio allows you to hold a mix of low-risk, stable ventures alongside higher-risk investments that could produce significantly larger returns.
For those new to investing, mutual funds are an excellent place to start.
What is a mutual fund?
A mutual fund is a collection of investments in securities such as stocks, bonds, and other assets managed by a professional, or a team of professionals, who directs funds to produce income for investors.
Investors in mutual funds benefit from the oversight of competent professionals, whose performance they can check on by researching the history of both the fund and the people responsible for running it. This makes mutual funds a smart choice for small investors interested in achieving stable returns without concentrating risk in one area.
What are the benefits of investing in a real estate mutual fund?
Real estate is an excellent way to diversify a portfolio, as it typically outperforms inflation over the long term.
Investing in a real estate mutual fund is a smart way for investors unable to or uninterested in buying property to acquire shares in real estate at a low price and without any of the hassles of ownership.
When interest rates are low, investing in a real estate mutual fund combines the liquidity of stocks with the large returns expected from property investments.
Generally, these funds invest in large commercial real estate projects, which are often much safer than smaller or individual real estate investments. The added benefit of the funds being managed by an expert can make the investment especially attractive.
Depending on how the fund invests, the distributions can be exempt from certain types of tax, which only adds to what income investors can expect from dividends and capital gains when properties appreciate.
What are the limitations of real estate mutual funds?
Real estate mutual funds offer a significant return, but the risk associated with the venture is proportionate. The real estate market is tied to interest rates, often has limited liquidity, and is at the mercy of the market, which can cause even diversified portfolios to suffer.
For those who remember the 2008 housing market collapse, a real estate investment may be a daunting prospect. The potential return, however, is appealing to many investors.
What type of real estate mutual fund should you invest in?
Investing in one of the larger fund companies in the real estate market can be a good first step for investors building their portfolios — their size makes them an inexpensive and diversified option.
It’s wise to select a fund that tracks the performance of real estate investment trusts (REITs) and allocates its capital accordingly.
For some investors, a smaller, individual REIT may also be an option worth considering, because these grow more quickly than their larger counterparts but do not have the same economies of scale or cash flow.
While the United States has one of the largest real estate markets in the world, there are opportunities abroad as well. Developing economies and emerging markets have a lot of potential for growth.
The bottom line
For people new to investing in this way, spreading resources out among several types of real estate mutual funds is a way to limit risk exposure and learn about the variables that affect values.
