Mutual Funds and REITs
With the way the economy is right now, it stands to reason that you need to choose the best possible real estate funding you can. There are many kinds of real estate funding available. We want to give you a brief overview. Most funding focuses on investing in securities in mutual funds that are offered by real estate companies. Mutual funds are utilized through selling shares by an investment company to shareholders. In this economy, Real Estate Investing Trusts are often replacing mutual funds. So we are going to look at REITS that are Real Estate Investment Trusts for a moment. The difference is that REITs are a corporation or trust that utilizes the pooled capital of many investors to purchase income property and or mortgage loans.
Open and Closed-Ended Funds
Lets begin with somewhat of a definition. Put simply, a mutual fund is considered an open-ended fund that is operated by an investment company. The investment company raises money from shareholders and invests in a group of assets in accordance with a stated set of objectives in the real estate funding.
One thing to consider is that a closed-end fund is sometime confused with a mutual fund. A closed-end fund is actually an investment trust that has a fixed number of shares and sells like stock.
Mutual Funds are Different Than Stock
Let’s look at the way a mutual fund works for a moment. The basic way mutual funds operate is by selling shares of the fund to the public. You may be familiar with how stocks work. Even though this is similar to what companies do to raise money in selling stock to shareholders, there is a difference. Mutual funds take the money they receive from the sale of their shares and use it to buy various investment vehicles. You may have heard of these vehicles as ways to save money in stocks, bonds, and money market instruments. Shareholders receive an equity position in the fund and in each of its underlying securities when they give to the fund in return for purchasing shares.
The Good and Bad News
One of the things we want to tell you is the good and bad news about mutual funds.
What does this mean for the shareholder? The great thing is that shareholders can sell their shares at any time for most mutual funds. The price of the shares fluctuates daily depending upon the performance or result of the investment securities held by the fund.
Mutual funds allow choice, liquidity, and a lot of convenience. However, the bad news is fees and a minimum investment may be required.
Different Kinds Of Mutual Funds
So how many kinds of mutual funds are available? There are many kinds of mutual funds: money market funds, aggressive growth funds, asset allocation funds, international funds, balanced funds, or tax-free bond funds just to name a few. You can guess that these funds operate on similar principles but have a specific purpose according to the situation.
Be Aware of Exposure to Risk
I bet you would like to know what the payoff of mutual funds actually is. The payoff of mutual funds includes diversification and professional money management. This may seem complicated but diversification allows for more consistent performance under a wide range of economic conditions. We want to see you avoid as much risk as possible. A brief summary of diversification is that it is a portfolio strategy created to reduce the exposure to risk. This strategy combines a variety of investments—stocks, bonds, and real estate – that are not all likely to move in the same direction.
Have you ever heard of Real Estate Investing Trusts? There are many benefits to REITs that are not found in other kinds of real estate funding. Here is a summary. REITs are traded just like stocks in major exchanges and are granted special tax considerations. The great thing is that REITs offer many benefits over actually owning properties. First, there is no minimum investment. Second, they are a very liquid investment unlike traditional real estate. Third, REITs allow sharing in non-residential properties as well, such as commercial or industrial properties.
This type of information may be a lot to take in right now, but one thing to remember is unlike mutual funds, REITs do not necessarily increase or decrease in value. The way they operate is in paying yields in the form of dividends no matter how the shares perform. Simply put, REITs can be valued based on fundamental measures similar to the valuation of stocks.
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