What Is a Real Estate Mutual Fund?

A real estate mutual fund is a type of investment made up of securities, usually stocks, of companies that purchase real estate with money collected from investors. Factors affecting the return of real estate mutual funds include the real estate market in general, housing starts, residential and commercial vacancy rates and interest rates. 

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Function: According to survey, real estate mutual funds "tend to focus their investment strategy on real estate investment trusts (REITS) and real estate companies." real estate investment trusts are companies that buy and manage real estate with funds collected from investors. Real estatecompanies run the gamut, from firms that sell real estate to firms that support real estate ventures, like real estate software providers and property management companies. A real estate mutual fund can include shares of stocks in a number of real estate investment trusts and in a number of real estate companies.

Advantage: Real estate mutual funds are an alternative to purchasing investment property, especially if you want to limit your investment, level of risk and involvement in management. They are also an alternative to real estate investment trusts if your goal is for your investment to continue to grow; the IRS requires real estate investment trusts to give all profits back to the investors annually, which means that the profits are subject to federal tax annually. Profit on mutual funds remains in the fund unless you sell. Real estate mutual funds, like all mutual funds and unlike real estate itself, are relatively liquid. You can usually sell them in one day.

Disadvantage: When you own real estate mutual funds, you have no role in deciding what companies are invested in or how they are run. Unlike directly owning stock in a company, you do not have voting privileges on issues having to do with the fund. Your role is diminished compared to most other types of real estate investment. You do not receive tax benefits like depreciation, although if you hold your mutual fund investments for more than a year your profits are taxed at the capital gains rate, just like actual real estate.

If you decide you'd like to invest in real estate mutual funds, do your research first. Use online stock screener to find funds specializing in real estate. Look at the funds' track records: see how they have performed over short-, mid- and long-term periods of time. Read the fund's prospectus, a report covering all the basics of a fund: who runs it, what the fees are, what the minimum investment amount is and what individual companies the trust owns. The prospectus will also describe the level of risk associated with the fund and define the fund's goals.

Investing in real estateinvestment trusts and buying a property yourself are the two obvious alternatives to real estate mutual funds. Real estate investment trusts are a good transition into actually purchasing investment property; you can actually go visit properties the real estate investment trust owns and read expense and income statements for them. One way to begin with your own rental property is to buy a new home and turn your former home into a rental rather than selling it; this way, you're already familiar with the expenses and taxes owed on the property, and can set the rent accordingly.

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