REIT Mutual Funds: What Are They?

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“Risk comes from not knowing what you’re doing”.

– Warren Buffett

If you have been thinking about investing in real estate but do not like the idea of managing actual properties then real estate investment trusts or REIT mutual funds would be perfect for you. You can hold shares in commercial or residential real estate and never have to hassle with collecting the rents or having to maintain the properties. You can research these funds online then send away for the prospectus for each one that interests you but then call and talk to a financial advisor to get your questions answered.

REIT funds do not pay corporate income taxes and for this privilege they are required to disperse 90% of their profits to their investors in the form of dividends. Dividends can be used to increase your holdings in your portfolio or you can invest in other ways with the money you get.

There are two REIT mutual funds investment styles you should concern yourself with: Actively managed REIT funds and passively managed REIT funds.

Actively managed REIT funds buy and sell shares of real estate throughout the year according to an investment strategy based on research of the market. Due to all the buying and selling going on actively managed REIT funds naturally incur higher maintenance fees and higher expense ratios. Expense ratios on actively managed REIT funds are typically over 1%.

Passively managed REIT funds buy and hold shares according to a REIT index so very little buying and selling takes place throughout the year. Conversely, passively managed REIT funds have lower maintenance fees and expense ratios due to the fact that once the shares are purchased they are held long term. Expense ratios can be as low as 0.26%.

I highly advise buying index funds. Although you may not beat the market you will perform significantly better than the active fund. The active fund might do better, but not after all the fees and expenses. In addition, if someone could really tell the future do you think they would be investing other peoples money for them.

Also Redemption fees are something else you need to consider. Redemption fees are charged to discourage investors from selling their shares often. Not all REIT fund managers charge redemption fees but the ones that do charge up to 1% if you hold your shares for less than a year.

Be sure to balance your portfolio and not over allocate this asset class. While real estate can make you a lot of money, it is still a very tight market and should not be over invested in. Your portfolio should reflect this. Ensure you are well diversified to minimize risk and loss.

There are also different types of accounts to hold your REIT fund in. Some pay out dividends that can be reinvested and won’t have tax implications and some pay out dividends quarterly. These accounts will have tax implications and you will have to report your capital gains on your tax return.

REIT mutual funds that hold these shares provide the diversification and income stability you need to secure your financial future.

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