29. July 2019

REIT Mutual Funds

REIT mutual funds are one of the best ways for any investor to grab a share of real estate returns without the large financial investment of purchasing real estate. Real Estate Investment Trusts (REIT) will never require you to fix the plumbing or replace a roof.

 

REITs are companies that manage a portfolio of various property investments. They earn income from rent collected on these properties and other fees. When the company earns a profit they then pay out part of the profits in the form of dividends to all stockholders. They can invest in a variety of properties such as shopping malls, office buildings, hotels, or apartments.

 

The biggest advantage of a REIT mutual fund is that it allows the average investor to invest money into real estate. They essentially eliminate the expenses and difficulties of buying properties.

 

Another factor that draws investors to REITs is of course the dividends they pay out. As longs as Real Estate Investments Trusts pay at least 90% of their taxable income to stockholders each year they are exempt from federal tax. However, do not be confused, dividends are taxable as they are considered income by the IRS. This factor makes REITs an often bad choice for a taxable account and are better suited for a 401(k) or tax-deferred account.

 

REIT Mutual Fund Investments

 

A real estate investment trust mutual fund can be actively managed (buy and sell) or passively managed (buy and hold) and they can be exchange-traded or closed-end funds. REITs are a great diversification tool for your portfolio since they tend to have a negative correlation to the stock market.

 

While portfolio allocation differs for every investor, the general rule of thumb is to have around 10% to 20% of your portfolio allocated in REIT mutual funds.

 

Definition of Mutual Funds

 

The definition of mutual funds: An open ended fund that is operated by an investment company. This company raises money from shareholders and then invests in various investment vehicles. Mutual funds raise money by selling shares of the fund to public investors (like yourself). A mutual fund will take the money they received and invest it in stocks, bonds and/or money market instruments.

 

OK, that mutual fund definition may have left you more confused then when you started. Here is a simpler definition. A mutual fund takes money from a large groups of individual investors, pools it together and then buys investments. Everyone who invested money then shares in any profits or losses of the fund in proportionate to the amount they invested and when they invested.

 

You may have noticed that in the first definition of mutual funds it stated "a open ended fund." This simply means that there is no limit to the number of shares that can be issued. Current or new investors can invest as much money as they want and the fund will simply issue new shares to them.

 

Conversely, a “closed ended” fund is similar to stock. Closed ended mutual funds issues a predetermined amount of shares in a initial public offering (IPO). After the IPO the shares then trade on a stock exchange. Closed ended funds are do not have to issue more shares like a open ended fund does.

 

Why do people invest in mutual funds? Mutual funds give investors the benefits of professional money management, diversification, convenience, liquidity and choice. This is what makes mutual funds so popular and attractive. These features are very hard to achieve by investing on your own. 

 

It is reported that around 90% of all investors own mutual funds in their portfolio. If you invest in a 401(k) at your job, it is very likely that you are investing in mutual funds. All in all, mutual funds are where most beginners as well as advanced investors should invest most of their money. They are fairly easy to understand and take most of the guess work out of investing, much as managed funds where traders trade for you.