How do property funds work?
Mutual funds
Posted by MoneyController on 27.01.2023
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Investing in a property fund means buying shares in a financial instrument that aims to generate returns by investing in the property market. "Comdirect Magazine" has dedicated an interesting analysis to real estate funds, explaining how they generally work (types, returns, diversification and management) and highlighting the opportunities and risks for investors.
Real estate funds are financial instruments that raise capital from a variety of investors to invest in real estate. This allows investors to participate in the property market without having to buy or physically own property. As explained in 'Comdirect Magazine', returns on such an investment typically come from either rising property prices or rental income. Of course, should the property depreciate in value or fail to generate income, this would result in a loss to investors.
One of the most important distinctions between property funds is between open-ended and closed-ended funds. As 'Comdirect Magazine' points out, open-ended funds are more flexible investment vehicles, less risky and aimed at a cross-section of clients. These funds also offer the possibility of getting your money back before the fund matures (subject to certain conditions and deadlines), and it is also possible to invest in them by making frequent, small deposits.
Closed-end funds, on the other hand, have a limited number of investors, higher minimum investment requirements than open-end funds, and are designed for experienced or institutional investors. They therefore involve greater liquidity risks than open-ended funds.
The risks of real estate funds depend not only on the type of fund but also on the riskiness of the securities in which they invest and on diversification. In this respect, real estate funds are similar to investment funds in financial securities such as equities and bonds, where the risk stems precisely from the composition of the investment portfolio. The management of these funds is active, but it is still possible to invest in ETFs that replicate the performance of property markets, for example.
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