Real Estate Fund

A Real Estate Fund is a type of sector fund. These funds deal with investment instruments issued by businesses associated with the real estate industry. The capital raised by these funds is employed in the acquisition, development, or management of real estate properties.

These funds can be managed either directly or indirectly, similar to traditional mutual funds. These funds mostly make investments in real estate management organizations and REITs. However, some of these funds may make direct investments in real estate properties. The funds usually do not provide investors with short-term income. Instead, their value increases over time.

A real estate fund is a sector fund that invests in assets or securities of real estate-related businesses. These funds provide real estate companies with the capital they require for the construction of a property. If the sector expands, the fund generates significant returns. Depending on the fund's investment purpose and several other factors, it might invest in real estate organizations or real estate investment trusts (REITs).

This fund enables investors to generate high returns by participating in the expanding real estate market. However, there are certain risks involved in these funds. In most cases, investors who lack the necessary financial resources to buy an investment property choose to invest in these funds. This investment is ideal for long-term investors because it has a minimum duration of around three to five years.

The features of these funds are as follows:

1. Long-term: The majority of investors in these funds often make long-term investments with the aim of generating long-term profits. This is mainly because it takes time to develop and sell a property.
2. Liquid: Unlike physical real estate, these funds provide investors with a certain degree of liquidity. Investors can sell their investments in a short period, such as one day, allowing individuals to profit from their investments at any time.
3. Profits: The investment returns rely on the expansion of the industry. However, the majority of funds are believed to provide substantial profits, especially if the investments are in areas where real estate is in high demand.
4. Little effort: This fund reduces the effort needed to buy a property. Skilled fund managers monitor the funds. They ensure that the investors do not have to deal with any further responsibilities. Investors can enjoy the advantages without being concerned about aspects such as documentation and legal issues.
5. Diversified portfolios: Many of these funds invest in a variety of properties. They try to include commercial, residential, rental, and hospitality developments in their portfolios. As a result, they offer investors the opportunity to profit from the development of several market sectors.
6. Charges: The majority of funds impose a one-time and management charge, which may be based on an established percentage of the amount invested.

Let us go through the following examples to understand this fund:

Example #1

Suppose Sam is an individual investor who wants to invest in real estate. However, he does not have the massive capital necessary to buy any property. Instead, he chose an investment fund that pools together the money of several investors and uses the collective amount for a real estate investment project. This investment fund utilizes the pooled capital to finance the development of several types of real estate properties, such as residential, hospitality, and commercial projects. This is a real estate fund example.

Example #2

Altern Capital, a real estate investment management firm based in Bengaluru, has launched its first fund. The fund is a Category II Alternative Investment Fund (AIF) that has been approved by SEBI and is called the JIRAAF AU INDIA REAL ESTATE FUND - I.  Its target size is Rs 250 crore, with a further Rs 100 crore greenshoe option. The fund has been created for real estate last-mile financing and projected development. It emphasizes lowering implementation and authorization risks, ensuring quick project delivery, and providing investors with steady earnings.

The benefits offered by real estate fund investment include the following:

• These funds provide an excellent substitute for acquiring real estate for investment. They are a good choice for investors who want to reduce their investment and participate less in fund management. Moreover, it is suitable for investors who seek to reduce the risk involved.
• The funds are ideal for investors who want to diversify their portfolios. Due to the minimal investment required, these funds enable investors with limited money to participate in concentrated or diversified real estate investments.
• These funds may help safeguard the investment against inflation. Inflationary phases may result in increasing rent and property prices, which may also increase the value of real estate.
• One of the most significant advantages offered by these funds is stability. They are an ideal option for investors who seek a fund to offset the high-risk assets in their portfolio. Even though the value of the property may be volatile at times, these funds are not negatively impacted by it.

The risks associated with real estate fund investment are:

• Fluctuations in the interest rate influence mutual funds that invest in real estate. An increase in interest rates may also impact the earnings from these funds.
• These funds are not entirely safeguarded from market risks. Any downturns in the real estate market will impact them. 
• Investing in these funds means that investors will not have any control over the management of the fund or the businesses in which their money is being invested. Furthermore, investors will not be able to vote on matters related to the fund.

The difference between both has been discussed below:

Real Estate Fund

• This fund is a kind of mutual fund that deals in assets issued by publicly traded real estate businesses, including REITs. These funds usually buy stocks related to real estate and REITs. 
• The funds' share prices change just once every day, and they do not fluctuate like equities. 
• A fund for real estate can be purchased from an online brokerage or directly from the business that started it.

REIT 

• A real estate investment trust, or REIT, is a type of business that trades like stocks and makes investments in income-generating real estate. They deal directly with real estate by owning, running, or funding properties that generate earnings. 
• REITs are traded on major exchanges and experience price swings throughout the trading day. 
• The majority of REITs trade at a significant volume and are highly liquid.

The differences are as follows:

Real Estate Fund

• These funds are groups of funds invested in a wide range of properties, from residential to commercial. Such assets can be situated across all regions. 
• These funds are managed by competent managers who oversee every aspect of the fund's operations and adhere to an established investment plan.
• Investors may combine their money and allocate it across multiple properties instead of purchasing one property.

Real Estate Syndication

• Syndication is a collective investment in which multiple investors combine their funds to finance a significant project or real estate. 
• In real estate investing, a syndication is any instrument in which several investors contribute funds.
• The sponsor and investor are the two parties involved in any real estate syndication. The sponsor is in charge of sourcing each contract and overseeing all administrative tasks during the investment.