REIT vs Real Estate Fund

REITs invest directly in real estate by owning, operating, or financing income-generating properties. Real estate funds primarily invest in REITs and stocks related to real estate.
EXPLORE FUNDS
Difference between REIT and Real Estate Funds
EXPLORE FUNDS
3 min
17-September-2024

REITs and real estate mutual funds provide easy access to diversified real estate assets with liquidity. While REITs distribute dividends to investors, real estate funds focus on enhancing value through the appreciation of their holdings.

The choice in the REIT vs real estate fund comparison, the choice of a better option for you depends upon your financial goals, your level of tolerating risk, and personal preferences. To help you understand which is a better choice between REITs and real estate funds, let us start by discussing what they are.

What is REIT?

The full form of REIT is Real Estate Investment Trusts. REIT is a trust, corporation, or association, which invests in commercial real estate, hotels, apartments, and other real estate properties. Their main aim is to own and manage real estate properties to build wealth. They mainly invest in real estate that produces income. REITs are traded in the same way as stocks.

What is a real estate fund?

Real estate funds are nothing but real estate mutual funds. This is a sectoral mutual fund, which invests mainly in company stocks that invest in projects related to real estate properties. Real estate funds can also invest in REITs. They can either be managed actively or passively. A professional such as a fund manager can manage this fund. It may track the composition of benchmark indices to provide you with a similar return. However, a fund manager can also manage it actively and make adjustments as per market conditions to surpass benchmark returns.

Differences between Real Estate Funds and REITs

If you want to know which is better for you as an investment option, the answer depends on your:

  • Financial objectives
  • Current situation,
  • Availability of investable funds
  • Risk tolerance level

Both of them differ from one another in terms of investment structure, liquidity, diversification, management and expenses, tax considerations, and income distribution. Here are the top three considerations:

Structure of investment

REITs are companies that invest/manage real estate properties that generate revenue such as retail malls, commercial buildings for offices, and apartments. As an investor, you can buy shares of REITs and also trade in on stock exchanges, just like you do with stocks.
Real estate mutual funds pool funds from many investors and create a diverse portfolio of real estate to provide you with capital appreciation. They also provide you with dividends from time to time.

Liquidity

When compared with real estate funds, Real Estate Investment Trusts provide you with more liquidity. This is mainly because REIT shares are available for buying and selling on stock exchanges across the trading day.
In the case of real estate mutual funds, you can sell at any time of the trading day. However, you can know the NAV value of your sale only once, especially after the close of the market. This means you will get the sale price only once and that will be the close price of that trading day. This makes it difficult for you to enter or leave holdings.

Diversification

Real estate funds provide you with greater diversification. This is because the fund managers invest in more diverse assets related to the real estate sector. REITs also offer you diversification but their investment is particularly concentrated in specific geographies, which may give rise to concentration risk.

REITs vs. Real estate mutual funds: A comparative table

Feature

REITs (Real estate investment trusts)

Real estate mutual funds

Definition

Companies that own, operate, or finance income-generating real estate.

Mutual funds that invest primarily in stocks of companies involved in real estate.

Investment type

Direct investment in real estate properties or mortgages.

Indirect investment through equity shares of real estate companies.

Regulation

Governed by SEBI regulations specifically for REITs.

Governed by SEBI regulations for mutual funds.

Liquidity

High liquidity, traded on stock exchanges.

Relatively high liquidity, can be redeemed with fund houses.

Income source

Rental income from properties, capital appreciation.

Dividends from real estate companies, capital appreciation.

Minimum investment

Can be relatively high due to property values.

Generally lower, as mutual funds allow small investments.

Dividend payout

Mandatory to pay out 90% of taxable income as dividends.

Dividend payouts depend on the fund's policy and performance.

Diversification

Diversified across various properties and locations.

Diversified across various real estate company stocks.

Risk level

Moderate, tied to real estate market performance.

Moderate to high, tied to stock market and real estate sector performance.

Tax treatment

Dividends taxed as per income tax slab rates; capital gains subject to long-term/short-term capital gains tax.

Dividends and capital gains taxed as per mutual fund taxation rules.

Management style

Managed by professional real estate managers.

Managed by fund managers with expertise in real estate sector stocks.

Entry/Exit load

Brokerage fees and other transaction costs.

May include entry/exit load, depending on the fund house.

Transparency

High transparency with regular disclosures.

High transparency with regular NAV updates and disclosures.

 

Features and benefits of REITs

Real Estate Investment Trusts (REITs) are investment vehicles that allow investors to gain exposure to the real estate market without the hassle of directly owning and managing properties. Here are some of the key features and benefits of investing in REITs:

  • Diversification: REITs invest in a diverse portfolio of real estate properties, providing investors with exposure to different sectors like residential, commercial, retail, and industrial. This diversification helps mitigate risk.
  • Liquidity: Unlike direct real estate investments, REITs are publicly traded and can be bought and sold easily on stock exchanges, offering high liquidity to investors.
  • Professional management: REITs are managed by experienced real estate professionals who handle all the investment decisions, property management, and operations, allowing investors to benefit from their expertise.
  • Stable income: REITs are required to distribute at least 90% of their taxable income as dividends to shareholders, providing investors with a steady stream of income.
  • Tax advantages: REITs are exempt from corporate income tax, provided they meet certain criteria, which can result in higher returns for investors.
  • Low entry barrier: REITs allow investors to participate in the real estate market with relatively small investment amounts, making it accessible to a wider range of investors.
  • Inflation hedge: Real estate assets tend to appreciate in value during inflationary periods, and REITs can provide a hedge against inflation.

Overall, REITs offer a convenient and diversified way for investors to gain exposure to the real estate market and potentially generate stable income and long-term capital appreciation.

Features and benefits of real estate mutual funds

Real estate mutual funds are investment vehicles that allow investors to participate in the real estate market without the hassle of directly owning and managing properties. Here are some of the key features and benefits of investing in real estate mutual funds:

  • Diversification: Real estate mutual funds invest in a diversified portfolio of real estate-related securities, such as shares of real estate companies, REITs, and other real estate-linked assets, reducing the risk associated with a single property investment.
  • Liquidity: Unlike direct real estate investments, real estate mutual funds can be bought and sold easily, providing investors with high liquidity.
  • Professional management: Real estate mutual funds are managed by experienced fund managers who handle all the investment decisions, research, and portfolio management, allowing investors to benefit from their expertise.
  • Low investment threshold: Real estate mutual funds have a relatively low minimum investment requirement, making them accessible to a wider range of investors, including those with limited capital.
  • Inflation hedge: Real estate assets tend to appreciate in value during inflationary periods, and real estate mutual funds can provide a hedge against inflation.
  • Flexibility: Investors can choose from a variety of real estate mutual fund schemes, such as sector-specific funds or diversified real estate funds, based on their investment objectives and risk tolerance.
  • Tax efficiency: The income and capital gains generated by real estate mutual funds are taxed as per the applicable tax laws, which can be more favourable compared to direct real estate investments.

Are you searching for the best mutual funds? Check out these different mutual fund categories for smart investing!

Different types of REITs

Real Estate Investment Trusts (REITs) are a popular investment vehicle that allows individuals to invest in real estate without directly owning and managing properties. There are several types of REITs, each with its unique characteristics and benefits. Here's an overview of the main types of REITs:

Equity REITs

Equity REITs are the most common type of REIT. They own and operate income-producing properties such as commercial buildings, apartments, and shopping centres. Equity REITs generate revenue through rental income and property appreciation. They are listed on major stock exchanges and offer investors a way to diversify their portfolios and earn regular income in the form of dividends.

Mortgage REITs

Mortgage REITs, also known as mREITs, do not own properties but instead invest in mortgages and other types of real estate debt. They generate income through interest payments on these mortgages. Mortgage REITs are less volatile than equity REITs but offer lower returns.

Hybrid REITs

Hybrid REITs combine elements of both equity and mortgage REITs. They invest in a mix of properties and mortgages, providing a diversified income stream. Hybrid REITs offer a balance between the stability of mortgage REITs and the potential for growth of equity REITs.

Publicly traded REITs

Publicly traded REITs are listed on major stock exchanges and are easily tradable. They offer liquidity and transparency, making them a popular choice for investors.

Private REITs

Private REITs are not listed on stock exchanges and are typically available only to accredited investors. They offer a higher level of control and customization but are less liquid than publicly traded REITs.

Public non-traded REITs

Public non-traded REITs are not listed on stock exchanges but are registered with regulatory bodies. They offer a higher level of stability and are less subject to market fluctuations but are less liquid than publicly traded REITs.

Privately placed REITs

Privately placed REITs are not traded on stock exchanges and are available only to a select group of investors. They offer a higher level of customization but are less liquid and less transparent than publicly traded REITs.

Which is better between REITs or real estate mutual funds?

Real Estate Investment Trusts (REITs) and Real Estate Mutual Funds (REMFs) are two popular investment vehicles that allow individuals to gain exposure to the real estate market without directly owning and managing properties. While both options offer diversified and concentrated real estate investments with relatively low minimum investments, they differ in their structure, performance, and benefits. REITs are companies that invest directly in real estate through properties or mortgages, listed on major stock exchanges and subject to specific tax requirements, including distributing at least 90% of their taxable profits to shareholders annually in the form of dividends.

REMFs, on the other hand, are professionally managed investment vehicles that pool capital from multiple investors to invest in various real estate assets, such as REITs, real estate operating companies, and other real estate-linked securities. REITs perform well when interest rates decline and rents increase, offering tax advantages, high dividend yields, and are regulated by the Securities and Exchange Board of India (SEBI). REMFs, while less liquid and with higher management fees, provide professional management, extensive research, and broader diversification. The choice between the two depends on individual investment goals, risk tolerance, and preferences.

Summary

If you are looking for an analysis of REITs vs real estate funds for investing, it depends completely on your preferences and goals. You should analyse your risk tolerance level and compare other variables such as your financial goals, liquidity issues, and others.

Do you want to invest in mutual funds? Have you explored the Bajaj Finserv Mutual Fund Platform? Explore more than 1000 mutual funds listed on the platform. Just compare mutual funds, and calculate expected returns by using the SIP calculator and lumpsum calculator before investing.

Frequently asked questions

What kind of returns do REITs produce?
In the USA, REITs have given an average annual return of 9.9% during 1990-2010. The ten-year average annual return of the US-based real estate market, FTSE NAREIT Equity REIT Index, was 8.34% (as of June 2022). Its 25-year average annual return was 9.05%. This was much more than the return of both the S&P 500 (7.97%) and Russell 2000 (7.41%) indices. In India, the total return of Embassy Office Parks REIT and Mindspace Business Parks REIT is 7.2% and 7.3% respectively (as of December 2023).
Is REIT different from REMF?
Both similarities and differences are there between REIT (Real Estate Investment Trust) and REMF (Real Estate Mutual Fund). Both REIT and REMF have fairly high liquidity. They can be bought and sold easily. But there are significant differences too. The decision to include companies in a trust portfolio and manage them is made by a real estate investment trust. You can bet on that trust’s profitability by buying shares of the REITs. However, in the case of REMF, the portfolio is created by a fund manager on your behalf and manages it professionally. You can get returns in the form of capital appreciation of your investment as well as dividends. However, in the case of REITs, you can make money by earning rental income regularly.
How do I start investing in a Real Estate Fund?
You can start investing in real estate funds by choosing the ideal one, opening a brokerage account, and then purchasing the right one. You can use the platform to buy or sell funds listed on the stock exchange. Investors can also apply for REIT’s initial public offer, where Rs. 10,000 to 15,000 is the minimum value of the application.
What is the difference between REIT and real estate crowdfunding?
REITs and real estate crowdfunding differ in terms of liquidity, transparency, income, control, and risk and reward. The crowdfunding projects are riskier than the REITs. When it comes to investing in specific property types, real estate crowdfunding gives you more control. When it comes to stability of income REITs are better than real estate crowdfunding.
Are REITs better than physical real estate?
The best thing about REITs over physical real estate is that the former enables you to invest with less capital.
Are REIT funds a good investment?
Yes, REIT is a good investment because it helps you get long-term capital appreciation and also strong dividends.
Can REITs lose value?
In the case of publicly traded REITs, you may lose value when interest rates increase.
How do REITs generate income?

REITs generate income primarily through rent from properties they own and invest in, mortgage interest, or gains from property sales. They must distribute at least 90% of their taxable income to shareholders as dividends.

What is the primary difference between REITs and real estate mutual funds?

REITs invest directly in real estate and trade on stock exchanges, while real estate mutual funds invest in a diversified portfolio of real estate-related assets, including REITs and real estate stocks, managed by professional fund managers.

Are REITs or real estate mutual funds more tax-efficient?

REITs tend to be more tax-efficient than real estate mutual funds, as they do not pay corporate income tax and distribute a high percentage of their income as dividends.

What kind of returns can investors expect from REITs and real estate mutual funds?

Returns vary based on market conditions, but REITs generally offer higher dividend yields, while real estate mutual funds provide diversified exposure and can have varying performance based on their holdings.

What are the risks associated with REITs?

REITs can be sensitive to interest rate changes and economic fundamentals, such as GDP growth, unemployment, and consumer spending. They can also be affected by changes in property demand and rental prices.

What are the risks associated with real estate mutual funds?

Real estate mutual funds can be less liquid, have higher management fees, and be less tax-efficient than REITs. Their performance is closely correlated with the REITs they hold.

How does the investment horizon differ between REITs and real estate mutual funds?

Both REITs and real estate mutual funds are suitable for medium- to long-term investors seeking dividend income and capital appreciation. However, individual investment strategies and goals may influence the choice between the two.

Can real estate mutual funds provide broader diversification than REITs?

Yes, real estate mutual funds can offer broader diversification as they may invest in a variety of real estate assets, including REITs and real estate operating companies, reducing risk and transaction costs for investors.

How do economic factors affect REIT performance?

Broader economic factors such as GDP growth, unemployment, and consumer spending affect property demand and rental prices, influencing REIT revenues and performance.

Why are REITs considered more liquid than direct real estate investments?

REITs are traded on stock exchanges, making them more liquid and easier to buy and sell compared to direct real estate investments, which are typically less liquid and involve higher transaction costs.

What should investors consider before investing in REITs or real estate mutual funds?

Investors should consider their investment goals, risk tolerance, and the specific characteristics and performance of the REITs or real estate mutual funds they are interested in. Consulting a financial advisor with expertise in real estate investments is also recommended.

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