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

Megha
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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Check The Top Investment Firms and Online Trading Platforms
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Check The Top Investment Firms and Online Trading Platforms

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What is more, at Schwab, no minimums are required to open an account, which means that they cater to the investor at any level of capital. Client service is rated highly, available every day of the week, all day long.J.P. Morgan Wealth ManagementJ.P. Morgan Wealth Management is ideal for high-net-worth investors who require full-service wealth management solutions. This firm provides tailored financial planning, investment advice, and portfolio management services, leveraging the expertise of top financial professionals.What sets J.P. Morgan apart is its seamless integration with banking services, making it easy for clients to manage their investments alongside everyday banking needs. 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What to Expect in Corporate Bond Funds: A Beginner's Guide
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What to Expect in Corporate Bond Funds: A Beginner's Guide

  Corporate bonds are debt securities issued by companies or other organizations to raise capital. They can be bought directly from a company or as part of a fund that invests in them. 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. In this article, we take you through the different types of corporate bond funds and what you should keep an eye out for when investing in them.   What to look for when investing in corporate bond funds 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 fund's track record: How has the fund performed in different types of market conditions? This can help you to understand how the fund has performed over time. The types of companies the fund invests in: What type of companies does the fund invest in? Does it specialize in one sector, such as healthcare or utilities, or is there a variety across different industries? This will help you to understand how the fund's holdings will be affected by the different sectors' performance. The fund's management fee: How much does the fund charge in fees? Fees will reduce the fund's returns over time. 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Effective Future Hedging Strategies For Market Traders
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Effective Future Hedging Strategies For Market Traders

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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. 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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. 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The Major Differences Between Financial Planner Vs. Adviser
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The Major Differences Between Financial Planner Vs. Adviser

When considering your financial future, you might be considering hiring a financial adviser or a financial planner. These professionals can help ensure you’re on track to meet your long-term financial goals. But what’s the difference between a financial adviser and a financial planner? Depending on your needs, one may be better suited than the other. Financial advisers and planners have different areas of expertise.  A financial adviser is usually an insurance agent who advises clients on how to meet their financial obligations through buying life, disability, and other insurance policies. On the other hand, a financial planner generally works with clients over an extended period to establish a plan for meeting their future financial goals through various strategies like creating savings accounts, investing in retirement plans, or buying property. If you’re unsure which is right for you, here is some more information about the differences between financial planners and advisers so that you can make an informed decision.   What is a Financial Adviser?   Financial advisers help you make informed decisions about your money. They can help you plan for long-term goals like retirement, college, or emergencies, as well as help you manage your current investments. A financial adviser can work with you to manage your entire financial plan, from helping you set financial goals to finding the best financial products to meet your needs. As an adviser, you have a fiduciary responsibility to always act in your best interest. This means you’ll put your client’s interests ahead of your own. A financial adviser may be a good fit for you if you’re comfortable with an adviser solely managing your investment portfolio. At the same time, you focus on other aspects of your finances, like paying off your debt, creating a budget, and saving for emergencies.   What is a Financial Planner?   A financial planner is a professional who helps you organize your financial future. Financial planners can help you set goals and create a plan to achieve them. They can also help you assess your current financial situation and determine your needs, like retirement or college savings accounts, and help you find ways to meet those needs. Planning can be a one-time event, or it can be an ongoing process. Some financial planners work with clients on an ongoing basis, meeting with them regularly to assess their progress and make adjustments as needed. This flexible approach can be particularly helpful for clients trying to balance their financial needs with other life priorities, like caring for a young child or elderly parent. A financial planner can help you with everything from assessing your current financial situation to setting financial goals and creating a plan to achieve them.   What’s the Difference Between a Financial Planner vs. Adviser?   Financial advisers and financial planners both help you manage your money and make informed decisions about your financial future. Where they differ, however, is in terms of their area of expertise. A financial adviser provides advice on a wide variety of financial products, such as life or disability insurance, stocks and bonds, retirement plans, and real estate. On the other hand, a financial planner generally focuses on helping clients meet their long-term financial goals through savings and investment strategies.  Planning for your future, like retirement or college, can be daunting. You may not know where to begin or what steps to take to meet your goals. A financial planner can help you with this process and provide guidance on how to best meet your financial needs. Planning is an ongoing process; financial planners often meet with their clients regularly to assess their progress and make adjustments as needed. This can be particularly helpful for clients trying to balance their financial needs with other life priorities, like caring for a young child or elderly parent.   Financial Advisers and Conflicts of Interest   Financial advisers can be agents who sell you financial products or traditional advisers who manage your investments. One of the main differences between financial planners and financial advisers is that financial advisers have a fiduciary responsibility to act in your best interest at all times. This means that when you hire a financial adviser, they will put your interests ahead of theirs.  A financial adviser who is also working as an agent for a company that sells financial products, like life or disability insurance policies, may have a conflict of interest between selling you these products and putting your interests first. On the other hand, a financial planner does not sell financial products. This means that they are solely focused on helping you meet your financial goals through savings and investment strategies.   Financial Planners and Conflicts of Interest   Financial planners who work with clients on an ongoing basis often charge a fee for their services. This fee may be charged on a one-time or ongoing basis. As with any financial adviser, however, you may want to ask how your planner is being compensated before hiring them. Because financial planners often work with clients on an ongoing basis and make adjustments to their clients’ financial plans, they may charge a fee for the services they provide. Some financial planners may charge a fee based on a percentage of your assets, while others may charge a flat fee or by the hour.   Conclusion   Financial planners and financial advisers both help you manage your money and make informed decisions about your financial future. However, there are some key differences between financial planners vs. advisers. A financial adviser can help you with everything from assessing your current financial situation to setting financial goals and creating a plan to achieve them. A financial planner can also help you set your goals and create a plan to achieve them but generally works on an ongoing basis to help you stay on track.  A financial adviser can help you with your entire financial plan, from helping you set financial goals to finding the best financial products to meet your needs. A financial planner can also help you set your goals but may only work with you on an ongoing basis if you are trying to meet a specific financial need, like saving for retirement. One, this is for sure. This is the fact that both of these individuals can help you plan your financial future very well. We hope our article will resolve all your doubts regarding financial planners vs. advisers.