Investing for the long term comes with plenty of choices. Two common options are managed funds and real estate investment trusts. Both give you access to professionally managed investments without picking the individual assets yourself.

But the two investments aren’t the same. Managed funds can cover a wide range of asset classes, while real estate investment trusts invest directly in property and often appeal to income-seeking investors.

If you’re looking to grow your wealth over time, comparing these two options can help. The right choice depends on your goals, risk tolerance, and how hands-on you want to be. Let’s break it down.

What is a managed fund?

A managed fund is an investment where money from multiple investors is pooled together. Professional managers then decide where to invest that pooled money. It’s a simple way for investors to access a broader range of investments without managing everything themselves.

Here’s how it works: you invest in a managed fund, and your money joins funds from other investors. The manager uses this combined pool to buy assets like shares , bonds , property , or even cash.

There are different types of managed funds, each focusing on specific goals or assets. For example:

• Real estate funds: These funds invest in property, like commercial real estate or property trusts.
• Estate-focused mutual funds: A type of managed fund that invests in real estate but can also include other assets.
• Diversified funds: These spread investments across shares, bonds, real estate, and other assets for broad exposure.
• Public mutual funds: Some managed funds, like public mutual funds, are open to all investors and offer broad access to different asset types.
• Capital appreciation: Certain managed funds aim for capital appreciation, focusing on long-term growth rather than income.

The appeal of a managed fund is its simplicity. Instead of picking individual assets, the fund manager does the work for you. Whether it’s growing wealth, generating income, or both, there’s likely a fund to match your goals.

However, not all funds are the same. Some take an active investing approach, aiming to outperform the market. Others follow an index for a more passive, low-cost strategy. In either case, though, the active involvement of a professional manager differs managed funds from exchange-traded funds (ETFs) .

What is a REIT?

An REIT, or real estate investment trust , is a company that owns, operates, or finances income-producing real estate. It’s a way for investors to gain exposure to real estate without buying direct property or managing it themselves.

In a nutshell, REITs pool money from investors to buy real estate like shopping centres, office buildings, and apartment buildings. These properties generate rental income, which is then shared with investors as dividend payments .

There are two main types of real estate investment trusts:

• Equity REIT: These own and manage physical properties, earning income from rent and property appreciation.
• Mortgage REITs: Instead of owning property, they invest in mortgages or loans, earning income from interest payments.

One of the standout features of an REIT is that it’s publicly traded on the stock exchange (like the Australian Securities Exchange ), much like shares. This means you can easily buy and sell an REIT, offering investors flexibility and liquidity.

For long-term investors, real estate investment trusts can be appealing because they combine exposure to property with the potential for regular income through dividend payments. But as with any investment, their value can go up and down, depending on market conditions.

How are managed funds and REITs similar?

While managed funds and real estate investment trusts differ in structure, they share some key similarities that might appeal to long-term investors.

• Access to a range of assets : Both options allow you to pool your money with others and invest in a diversified mix of assets. This aims to spread risk by reducing reliance on a single investment.
• Professionally managed : As mentioned, both are overseen by professionals. Whether it’s fund managers or REIT operators, experts handle the investment decisions for you.
• Income potential : Managed funds may offer distributions , while real estate investment trusts typically distribute rental income as dividend payments. Both can also provide opportunities for capital gain over time, depending on market performance.
• Liquidity : While you trade an REIT on the stock exchange, some managed funds also allow easy buying and selling. This flexibility can appeal to investors who may need access to their money.

Both options seek to make investing easier by offering broad access to assets without requiring you to manage everything yourself. The right choice will depend on your objective, risk profile, and how much flexibility you want.

What are the key differences between managed funds and REITs?

We’ve seen that managed funds and real estate investment trusts share some similarities. But they work in very different ways. As mentioned, managed funds offer more diversification by including various asset types, as opposed to focusing on real estate like REITs.

Here’s a side-by-side comparison to help you spot the key differences:

Feature	Managed fund	REIT
Structure	Funds which invest a pool of money in a range of assets.	Companies that own, operate, or finance property.
Asset focus	Can invest in shares, bonds, property, or cash.	REITs often focus on commercial real property, like retail spaces, warehouses, and offices.
Liquidity	May take days to buy or sell units.	Listed REITs are publicly traded on the stock exchange daily.
Income	Distributions are paid, but reinvestment is common.	REITs generally pay regular dividends from rental income. Mortgage REITs don’t own property but instead invest in loans and aim to earn income from interest payments.
Management approach	Managed by professionals; active or passive.	Operated by professionals managing real estate.
Fees	Management fees vary and can impact returns.	Often lower fees, but listed REITs may incur taxes.
Risk	Risk depends on the fund’s asset mix.	Linked to property markets and share price changes.
Access	Available directly through fund managers or platforms.	Buy and sell on the stock exchange like shares.

Understanding these differences can help you decide which approach fits your investment strategy. Or, you might even find room for both in your portfolio.

What are the risks of investing in managed funds vs REITs?

Every investment carries risks, and managed funds and real estate investment trusts are no exception. Understanding how their risks differ can help you decide what works for your strategy.

Market fluctuations

Real estate investment trusts are listed on the stock exchange, so their prices change daily. This means they can potentially be more volatile, especially during economic uncertainty or property market downturns. For example, rising interest rates can impact property values and investor demand, causing REIT prices to fall.

Managed funds also face market risk , but the level depends on what the fund invests in. A diversified fund holding shares, bonds, and property may potentially cushion against large swings, while a fund focusing heavily on one asset could potentially be riskier.

Income uncertainty

Real estate investment trusts often rely on rental income from their properties. If vacancy rates rise or tenants struggle to pay rent, income (and dividend payments) can decline. For instance, a retail-focused REIT may face challenges during periods of low consumer spending. Conversely, investing in mortgage REITs that are backed by loans may face risks and benefits that are impacted by interest rates, mortgage uptake rates, and mortgage defaults.

Managed funds distribute returns based on the performance of their underlying assets. This income can fluctuate, particularly in funds invested heavily in shares or other higher-risk assets.

Management risk

Though both investments depend on professional management, but there’s no guarantee of success. For managed funds, the manager’s decisions influence performance. Poor strategies or high fees can eat into your returns over time.

Real estate investment trusts are also subject to management decisions. For example, mismanaging property maintenance or taking on too much debt can increase risk and reduce returns.

Liquidity risk

Real estate investment trusts are typically easier to buy and sell since they trade on the stock exchange. However, in a market downturn, finding buyers at your desired price can be harder.

Managed funds, especially unlisted ones, may take longer to sell. Some funds also have restrictions during turbulent market periods. This can limit access to your money when you need it.

Interest rate risk

Both investments are sensitive to interest rates. Higher rates can reduce REIT property values and increase borrowing costs for property managers. Managed funds holding bonds may also see their value drop when interest rates rise.

Balancing risks and rewards

While managed funds may potentially spread risk through diversification, their returns depend on the assets they hold. REITs offer direct property exposure and potential income but come with market volatility.

No investment is risk-free, and past performance doesn’t predict future results. The key is to understand how these risks align with your goals, time horizon, and comfort with uncertainty.

Which option suits different types of investors?

Choosing between managed funds and real estate investment trusts is influenced by your goals, how much risk you’re comfortable with, and how hands-on you want to be. Let’s look at which might suit different types of investors:

• Investors looking for regular income : REITs historically have appealed to investors seeking theoretically consistent income, thanks to their focus on rental earnings and dividend payments. For example, a listed REIT might distribute earnings from office buildings or retail centres quarterly.
• Long-term investors seeking diversification : Managed funds may suit those wanting exposure to a mix of assets. For instance, a diversified managed fund could include Australian shares , global property, and fixed-income investments all in one.
• Investors who value liquidity : If you prefer easy access to your money, listed REITs can offer more flexibility.
• Investors with specific goals : Managed funds offer strategies tailored to different needs. For example, some funds focus on growth, while others prioritise stability or income. This can make them appealing to investors with clear, long-term objectives. Even so, to stress the point, all investments carry risk, and no fund is guaranteed to achieve its goals.
• Investors comfortable with market fluctuations : REITs are linked to the share market and property values, so their prices can change daily. If you’re comfortable with this volatility, REITs may align with your strategy.
• Hands-off investors : Both options suit people who prefer professional management. But managed funds, particularly actively managed ones, may appeal more to those wanting a “set and forget” approach.

Sometimes, it’s not about choosing one or the other. A combination of REITs for income and managed funds for diversification might be worth considering, depending on your objectives. Or, some investors might prefer estate mutual funds for broader exposure to real estate, combined with the professional oversight of managed funds.

REITs or managed funds – the choice is yours

Managed funds and real estate investment trusts each bring something different to the table, from diversification to regular passive income. Both can provide potentially convenient options for investing to build your wealth.

What does this mean for you? The right choice depends on your goals, risk tolerance, and how involved you want to be with your investments. Some investors might lean toward one, while others may see value in both.

Grasping the differences and similarities between managed funds and REITs can help you decide if they have a place in your portfolio. Do your research, stay informed, and choose what aligns with your overall strategy.