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REITs vs. Real Estate Mutual Funds: Which Is The Better Option?

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Written By Megha - May 27, 2021
REITs vs. Real Estate Mutual Funds: Which Is The Better Option?

After the financial crisis of 2008, the real estate market rose like never before. Today, real estate investment is one of the most profitable tools for growing your money manifolds & generating wealth. Various investors are looking forward to tapping into this diverse stock market sector and enjoy access to the real estate world. But the considerable investment deters them from doing so. There are two investment options: real estate investment trusts (REITs) and real estate mutual funds. Both of these investment options are designed for investors who want to diversify their investments in the Real estate without burdening themselves with the hassle of direct investment. These real estate investment vehicles are bankable options as they have excellent liquidity and higher real estate stock prices and returns. However, choosing the one that suits you the best and making an informed decision is of utmost importance. 

 

As per Statista research, it is projected that the Real Estate sector in the U.S. will experience a tremendous annual growth of 3.37% by the year 2024. This sector will undoubtedly undergo prodigious growth in the foreseeable future, and the investors will benefit from high real estate stock prices.

 

Taking this into consideration, in this article, we are going to explore both the investment options and pick the one that will offer excellent real estate stock prices. This article is a quick overview of both of these investment options. You can either choose one among REITs and Real Estate Mutual Fund or can even start investing proportionately in both. Keep in mind — “Choosing between REITs or mutual funds is not an either/or question. You have to put both against each other and make a decision that fits in your investment requirements.”

 

What is a REIT?

 

REIT or Real Estate Investment Trust is a company, trust, or association that works primarily in owning profitable real estate assets and is further traded like stocks. There are two types of REIT’s namely Equity and Mortgage REITs. Like mutual funds, REITs also accumulate funds from different investors to purchase commercial shares at real estate stock prices and then earn income from it. It is one of the best investment options to enjoy earning from real estate without buying, financing, or managing the property on your own. The REIT portfolio usually contains apartments, data centers, healthcare centers, office buildings, retail shops, warehouses, hotels, and timberland. 

 

What is a Real Estate Mutual Fund?

 

Real Estate Mutual Funds are the sectoral funds that provide the investor’s exposure to REITs without actually doing the research and making the individual selection on your own. In a nutshell, this type of investment pools money from different investors and then purchases a diversified portfolio of REITs. However, the Real Estate Mutual Funds are not traded on stock exchanges, resulting in constant fluctuations of fund prices even when the stock market is functioning. If you don’t want to get into analytics and research, you must invest in real estate mutual funds without an iota of doubt.

 

Key Differences Between REIT and Real Estate mutual fund

 

- REITs directly invest in revenue-generating properties and are traded like stocks. At the same time, Real Estate mutual funds are investments in the securities or stocks of real estate companies. 

 

- REITs are traded just like other stocks on major stock exchanges. On the other hand, Real Estate Mutual funds can be bought and sold directly through the website or online brokers.

 

- Investors in REITs make money through the dividend they get from the taxable income, as 90% of it is distributed among the shareholders. In Real Estate Mutual Funds, investors enjoy the income through the value appreciation of the fund.

 

- REITs can be traded for the short term as they are highly liquid. However, Real Estate Mutual funds are for mid-term to long-term horizons as they are non-liquid assets. 

 

- REITs are investments in one kind of commercial real estate which offers a narrow portfolio. On the contrary, Real Estate Mutual Funds provide a diversified portfolio that helps to enjoy better real estate stock prices and returns. 

 

- Real Estate Mutual Funds are prone to higher expense ratios because of which the investors have to pay ongoing fees for enjoying active management of the funds by specialists. However, this is not the case with REITs, as it has a relatively low expense ratio. 

 

How To Decide The Better Investing Option For You?

 

Millions of investors in the market are looking for exposure to the booming real estate market. But the absence of knowledge and capital is stopping them from enjoying the higher real estate stock prices. For such investors, there are endless opportunities via REITs and Real Estate Mutual Funds. With these options, an investor can participate in the real estate market without compromising portfolio diversity and spending a massive amount. Now the question arises: Where to invest — REITs or Real Estate Mutual Funds? To solve this dilemma, you have to consider the following factors. They are the primary criteria for making sensible use of your money and enjoying impressive real estate stock prices.

 

1. Objective Of Investment: First thing first, you need to have clarity about your investment objectives. If you know the purpose, you can quickly figure out where to invest your valuable money. Ask yourself the drive, and you will have a clear idea of the best option for you.

 

2. Availability of Capital: Capital is another critical factor that determines the best investment opportunity. To invest in the real estate market via REITs and Real Estate Mutual Funds, you don’t need capital in lakhs or crores. However, the capital in REITs is usually higher as compared to mutual funds. To invest, check the current real estate stock prices and pick the investment option falling in line. 

 

3. Your Liquidity Aspect: When we talk about investment, we need to pay special attention to the liquidity aspect. You need to know the turndown time you expect from your investment and then pick the best deal. In Real Estate, REITs are highly liquid and can be converted into cash swiftly. In contrast, Real Estate Mutual Funds have mandated turndown time.

 

4. The audacity of Risk: Real Estate stock prices are highly sensitive, which makes it essential to know the audacity of risk before investing. You must be aware of the risk you are willing to take with your investment. In the case of REITs, there’s very little to shield because of a narrow portfolio. Hence, investment in REITs is a great option for high-risk bearing investors. 

 

The Bottom Line

 

Both REITs and Real Estate Mutual Funds are outstanding investment options. However, the final decision will wholly depend upon your requirements, expectations, and the funds you have amassed for investment. We don’t have a rulebook to offer (probably no one has) — but the idea is, before making a decision, you’ll need to assess every aspect. Whether you want to go with REITs or Real Estate Mutual Funds, it has to be congruent with your needs. Regardless of the type of investment, getting higher real estate stock prices & returns is of utmost importance for any investor. Just be mindful, intelligent & make an informed decision— you’ll win the race for sure!

 

 

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Stock Market Sectors

Stock Market Trends 2026: Smart Strategies For Investors

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Check The Top Investment Firms and Online Trading Platforms
Stock Market Sectors

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What to Expect in Corporate Bond Funds: A Beginner's Guide
Stock Market Sectors

What to Expect in Corporate Bond Funds: A Beginner's Guide

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For example, if the fund charges a 1% management fee and its investment grows by 10%, then after taking fees into account, its investor will only get 9% growth overall.   Bond fund investments and risks The main risk to a bond fund comes from the underlying bonds. The value of the fund will go up and down with the risk level of the market. The main risk to a bond fund comes from the underlying bonds. If you invest in a corporate bond fund, the risk level is higher than in a government bond fund. The risk level of a municipal bond fund falls somewhere in the middle. If the issuer of a bond goes bankrupt or is unable to repay the bond, then the fund may lose money. Corporate bond fund managers try to reduce this risk by investing in a diversified portfolio of bonds from many different issuers. Additionally, the manager of the fund may decide to sell the fund's holdings if he thinks that there is too much risk in the market. The price of a bond usually goes up when interest rates fall. If the Federal Reserve lowers interest rates, then this could cause the price of existing bonds to increase. Corporate bond funds are likely to see an increase in the value of their holdings.   Single strategy funds: Fixed-income universe funds Fixed-income universe funds invest in a diversified portfolio of corporate bonds, government bonds, and cash. These funds are ideal for investors seeking a reliable, low-risk way to grow their wealth over the long term. Fixed-income funds offer a much lower yield than equity funds, but they have significantly less risk as well. Fixed-income funds are an excellent option for investors in retirement who depend on their portfolio for a significant portion of their retirement income. They are often diversified by industry, geography, or duration. There are two types of fixed-income universe funds: single-strategy funds and multi-strategy funds. Single strategy funds invest in a diversified portfolio of bonds from only one sector, such as healthcare or telecommunications. The fund manager may invest only in bonds from one industry, or they may be a combination of industries. Single-strategy funds invest in a wide range of bonds, and their holdings can be high-yield or junk bonds. Their strategy is to buy the cheapest bonds available, which could be high-yield or junk bonds but is likely to have a higher risk of default.   Single strategy funds: Co-mingled funds Co-mingled funds invest only in a highly diversified portfolio of bonds from many different industries. They may also include a small percentage of stocks to increase the risk-reward profile to suit the needs of the individual investor. The risk level of a co-mingled fund will depend on the mix of bonds that it holds. In general, though, co-mingled funds are very conservative, low-risk investments with the primary goal of maintaining a stable value. They do not focus on one industry and may invest in a wide range of bonds, including some high-yield or junk bonds. These funds invest in a diversified portfolio of bonds, including some high-yield or junk bonds, that are co-mingled together in a single fund. These funds do not specialize in any one industry.   Multi-strategy funds: Diversified Co-mingled Funds Diversified co-mingled funds invest in a diversified portfolio of bonds from many different industries. These funds are ideal for people who are new to investing or who don’t have the time or interest to research specific bond investments. Diversified co-mingled funds typically have a fairly low average risk. Some of the largest and most popular mutual funds in the U.S. are diversified co-mingled bond funds. They typically do not focus on one industry and may invest in a wide range of bonds, including some high-yield or junk bonds. These funds invest in a diversified portfolio of bonds, including some high-yield or junk bonds. These funds focus on a wide range of industries.   Multi-strategy funds: Market-based Co-mingled Funds Market-based co-mingled funds invest in a diversified portfolio of bonds that are traded on an exchange, such as U.S. Treasury bonds, corporate bonds, and mortgage-backed securities. They are often market-based funds that are invested in a wide range of securities and can include high-yield or junk bonds. These funds invest in a diversified portfolio of bonds that are traded on an exchange. These funds focus on a wide range of industries.   Conclusions Corporate bond funds are often a good choice for smaller investors because they have lower minimum investment requirements and are more diversified than buying individual corporate bonds directly. There are two main types of corporate bond funds: funds of funds and single-strategy funds. A fund of funds invests in other mutual funds that specialize in different sectors or geographies. Single-strategy funds invest only in bonds from one sector or type of company, such as healthcare or telecommunications equity, but not both at the same time. Before you invest in a corporate bond fund, you should look at the fund’s track record, the types of companies the fund invests in, and any management fee. The main risk to a bond fund comes from the underlying bonds. Corporate bond fund managers try to reduce this risk by investing in a diversified portfolio of bonds from many different issuers.
Effective Future Hedging Strategies For Market Traders
Stock Market Sectors

Effective Future Hedging Strategies For Market Traders

Futures hedging strategies are essential risk management tools traders can use to protect themselves in the event of a sudden decline in the value of their position. Whether you are buying or selling a futures contract, there is always the risk that your position could lose value as a result of adverse market conditions. A futures hedge enables you to offset any losses on your position while locking in profits and limiting potential exposure to further downside risk. As with all types of hedging strategies, it's not always possible to avoid exposure to risks when trading futures contracts. However, implementing the right hedging strategy at the outset can greatly reduce the chances of incurring significant losses from an unhedged futures position. Futures hedging strategies come in many different forms, each serving a specific purpose in risk management. The six effective futures hedging strategies outlined below are some of the most commonly used methods for managing risks related to trading futures contracts.   1. Managed Futures Hedging Strategy   A managed futures strategy involves using a combination of long and short futures positions to create a synthetic position whose exposure to risk is largely independent of the market. A managed futures strategy is commonly used as a fixed-income hedge for interest rate-sensitive stocks, bonds, and funds. With this strategy, traders will short futures contracts in the same sector as their long position to create exposure that is not dependent on the level of interest rates. For example, suppose an investor holds a long position in an S&P 500 Index Fund that is sensitive to interest rate hikes. In that case, he can offset any losses on his position through a short futures contract in the same index. A managed futures strategy is a conservative approach to hedging since it uses products designed to be highly correlated with one another. However, this method may not be appropriate for all traders since it involves the use of short positions, which can lead to significant losses if the market rallies.   2. Cash Collar Futures Hedging Strategy   A cash collar futures hedging strategy involves purchasing a long position in a futures contract while selling a shorter-term contract. A cash collar futures hedge can be used to lock in the risk associated with holding a long position in an underlying asset. Under this strategy, traders will buy a longer-term futures contract and sell a shorter-term futures contract that has the same average price as the long position. For example, an investor who recently bought 100 shares of a company at $50 per share and wants to protect against a sudden decline in share value could protect his long position by using a cash collar futures hedge. A cash collar futures hedge is a conservative strategy because it guarantees the same return regardless of how the market performs. However, it also limits the risk of significant profit beyond the original long position.   3. Equity Collar Futures Hedging Strategy   An equity collar futures hedging strategy involves buying a put option while simultaneously selling a call option in the same underlying asset. Traders will use this strategy to reduce the risk of holding a long position in stock while also increasing the return associated with that position. For example, an investor who recently bought 100 shares of a company at $50 per share and expects a short-term rise in share value could protect the long position by using an equity collar futures hedge. An equity collar futures hedge is a conservative strategy that protects against a sudden decline in stock value. However, it also limits the potential for significant profit above the original long position.   4. Long Hedge Futures Hedging Strategy   A long hedge futures hedging strategy involves purchasing a futures contract and selling another futures contract with a later expiration date. A long hedge futures hedge can be used to lock in the risk associated with holding a short position in a futures contract. Under this strategy, traders will sell a futures contract and buy a longer-term one to offset the risk associated with the original short position. For example, an investor who recently sold 50 shares of a company at $70 per share and expects a sudden rise in share value could protect her short position by using a long hedge futures hedge. A long hedge futures hedge is a conservative strategy that protects against a sudden decline in stock value. However, it also limits the potential for significant profit above the original short position.   5. Short Hedge Futures Hedging Strategy   A short hedge futures hedging strategy involves selling a futures contract and then purchasing a futures contract with a later expiration date. A short hedge futures hedge can be used to lock in the risk associated with holding a long position in a futures contract. Under this strategy, traders will sell a futures contract and buy a longer-term one to offset the risk associated with the original long position. For example, an investor who recently bought 100 shares of a company at $50 per share and expects a sudden decline in share value could protect his long position by using a short hedge futures hedge. A short hedge futures hedge strategy is a conservative strategy that protects against a sudden rise in stock value. However, it also limits the potential for significant profit below the original long position.   6. Dual Hedge Futures Hedging Strategy   A dual hedge futures hedging strategy involves buying a put option while simultaneously selling a call option in the same underlying asset. This strategy combines an equity collar futures hedge with a long hedge futures hedge. It is often used as a fixed-income hedge for interest rate-sensitive stocks, bonds, and funds. For example, an investor who holds a long position in an S&P 500 Index Fund that is sensitive to interest rate hikes can reduce the risk of holding that position by using a dual hedge futures hedge. A dual hedge futures hedge strategy is a conservative strategy that protects against a sudden decline in stock value. However, it also limits the potential for significant profit above the original long position.   Conclusion   A futures hedging strategy is an essential risk management tool that can protect traders from significant losses in the event of a sudden decline in the value of their position. While it's not always possible to avoid exposure to risks when trading futures contracts, there are many different strategies traders can use to limit their risk and increase the likelihood of success in the futures market. When choosing which futures hedging strategy to implement, keep in mind that the more conservative strategies are often preferable to more aggressive approaches. Traders should also keep in mind that trading in futures can be a risky proposition. This is because the futures prices move faster than the underlying stocks they track. So, any sudden adverse movement in prices can lead to big losses. Traders can use futures hedging strategies to protect themselves against such risk.
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