Real estate has stood the test of time as one of two asset classes that has consistently grown faster than the rate of inflation over the decades. However, this form of equity ownership is financially out of reach for many people who lack the means to buy any kind of land or property directly. Fortunately, there are mutual funds that allow small investors to purchase shares in this sector just as with any other type of investment. These funds provide all of the traditional advantages of mutual funds in what is typically an expensive and illiquid asset class.

Real estate can provide an important measure of diversification in an investment portfolio. Rental properties can provide steady streams of income to landlords regardless of how the housing or other markets are performing, and commercial investment properties can be a reliable source of stable income that lasts for decades. They can also produce capital gains in bull markets, with the sale of any losing holdings being used to offset them.

The majority of Americans today who profit from real estate do so via residential home ownership. Real estate can also be purchased inside Unit Investment Trusts (UITs) or Real Estate Investment Trusts (REITs) that buy a specific list of properties or ventures and hold them for a specific period of time until the trust matures.

Be sure to also see A Guide to the Different Types of Mutual Funds

Real estate funds offer all of the traditional advantages found in any type of mutual fund, such as diversification, professional management and liquidity. But these advantages may represent a much larger difference between what these funds can offer and what investors who buy individual properties must deal with than other types of funds.

Although stock and bond funds offer these features as well, investors need far less capital to create diversified portfolios in those sectors than they do with real estate, as the amount of money that would be required to create a truly diversified real estate portfolio would obviously be many times the amount required to do so with virtually any type of publicly traded security. The difference in liquidity is similarly disproportionate, as it can take months or even years to sell some pieces of property, whereas real estate funds are able to redeem shares within three business: days for open-end funds just like any other type of fund.

See What Happens When Mutual Funds are Redeemed or Sold?

Another major difference between real estate and real estate funds lies in their respective tax treatments. Qualifying homeowners who sell their residences at a gain can exclude up to $250,000 of gain if they file singly or twice that much if they are married and file jointly.

Owners of rental properties who no longer desire to be landlords can exchange their holdings for a piece of commercial property that qualifies them for a tax-free exchange under Section 1031 of the IRC. Unfortunately, real estate funds cannot take advantage of these benefits as they only apply to individuals. But real estate funds will send out annual forms to all shareholders that break down all income, gains and losses that must be reported.

Read about How Mutual Funds are Taxed

Calculating these numbers for individual property transactions can be very complicated in some instances, especially when there is depreciation or depreciation recapture involved. Those who hold their shares inside IRAs or other tax-deferred retirement plans are of course exempt from this requirement.

There are several high-quality real estate funds available for discriminating investors who seek higher returns and superior performance. Zack’s Fund Research published a list of its five best real estate funds, including:

AMG Managers Real Estate Securities (MRESX) – This fund focuses on high income and capital growth over the long run. This is a non-diversified fund that invests in both REITs and real estate companies. The fund’s expense ratio is just slightly below that of its comparable peers.

Fidelity Series Real Estate Equity (FREDX) – This fund invests the majority of its assets in both domestic and foreign real estate companies. This is also a non-diversified fund.

Goldman Sachs Real Estate A (GREAX) – This fund seeks both capital appreciation and dividend income. It invests mostly in real estate companies, but can also invest up to a fifth of its assets in government and corporate bonds. This non-diversified fund held 39 separate issues as of June of 2014.

MFS Global Real Estate A (MGLAX) – This fund holds both domestic and foreign real estate issues. It concentrates on buying stocks of real-estate related companies, regardless of their market capitalizations. This non-diversified fund can also focus its assets in a particular country or region, and its expense ratio is also below that of its peers.

ProFunds Real Estate UltraSector Service (REPSX) – This fund focuses on achieving a daily return. This non-diversified fund only buys securities that are believed to have a daily return of 150% of the return of the Dow Jones U.S. Real Estate Index.

Be sure to also see The Cheapest Mutual Funds for Every Investment Objective

Real estate funds offer many advantages over individual properties including diversification and liquidity. However, they cannot match the tax advantages that come with some types of sales or exchanges of qualified individual properties. For more information on real estate mutual funds and how they can benefit you, consult your financial advisor.