400
Real Estate Mutual Funds
[Chap. 5.8]
The flip side
If the REIT does not invest in a sufficiently diversified range of real estate, the risks are naturally greater. There are also other risks that you must consider, including over-building, fire, earthquake or other natural calamities. Worse, the government, due to political compulsions, may change real estate tax laws, making it expensive to own property even on paper. Also, real estate is a cyclical market; today’s boom may sustain for a few more years, but a downswing is more or less inevitable. This means returns will not always be high or even predictable. And, like any mutual fund, the fund managers may make wrong calls, and leave the fund holding a lemon instead of a pot of gold. Real estate funds have the same risks that are associated with equity/debt mutual funds. For instance, you could make the wrong choice while selecting a real estate fund in which case you could be saddled with a non-performer. Although this is not a limitation with real estate funds per se, it serves to highlight that there can be poorly managed real estate funds just like there can be poorly managed equity/debt funds. If with equities three years is the minimum investment time frame, then with real estate investments you need to be even more patient. Buying property, developing it and then renting it out or selling it, is a high gestation activity. It could take some time before your real estate mutual fund actually starts making money REMFs offer an innovative option for investors to buy and trade shares in the real estate sector and collect dividends from capital appreciation and rental incomes. A REIT is basically a company that buys, develops, manages and sells real-estate assets, and allows participants to invest in a professionally managed portfolio of properties. The primary difference between a REIT and a real-estate company is that it is a pass-through entity, which distributes the majority of its