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#13
Investing in
Mutual Funds
and Real Estate
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Goals
Describe features and operating characteristics of a mutual fund
Differentiate between open-end, closed-end, and exchangetraded funds, discuss fund loads and charges
Discuss types of funds and services offered by mutual funds
Understand variables when selecting funds
Identify sources of return, calculate return on a mutual fund
Understand the role of real estate in a diversified portfolio
along with direct or indirect investing
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Mutual Funds and ETFs: Some
Basics
Financial services organization that
receives money from shareholders
and invests it on their behalf
Investors become part owners in a
securities portfolio
More people invest in mutual
funds than any other financial product
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Mutual Fund Concept
Pooled diversification
Investors buy into a diversified portfolio
of securities for the collective benefit of
individual investors
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Basic Mutual Fund Structure
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Why Invest in Mutual Funds
Diversification
Professional Management
Financial Returns
Convenience
But remember - No choice in securities selection
No control over sale of securities within fund
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Mutual Funds are
Organized and Run
Each fund is a separate corporation or trust
owned by shareholders
Management company - runs daily operations
Investment advisor - oversees portfolio
Distributor - sells fund shares
Custodian - safeguards fund’s assets
Transfer agent - executes transactions and maintains
shareholder records
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Open-End versus Closed-End
Open-End Investment
Companies
• “Mutual fund”
commonly denotes this
type of investment
company
• Shares purchased from
and sold back to
company
• New shares issued as
money flows in
• NAV is quoted price
Closed-End Investment
Companies
• Fixed number of
shares
• Trading between
investors in market
• Shares are listed and
trade at a discount or
premium to NAV
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Net Asset Value (NAV)
Net value of all securities held in fund’s
portfolio
NAV =
current price of fund assets - liabilities
number of outstanding shares
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exchange-Traded Funds (EFTs)
• Typically structured as index funds
– Spiders based on S&P 500
– Diamonds based on DJIA
– Qubes based on Nasdaq 100
• Trade on listed exchanges like closed-end
funds
• Numbers of shares change like open-end
funds
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exchange Traded Funds
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Important Cost Considerations
Load and No-load Funds
Load funds charge a commission when
purchased (Front-end load) or sold
(Back-end load)
No-load funds charge no commission
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Important Cost Considerations
• 12(b)-1 Fees annual fees for
marketing and
promotion
• Management
Fees - annual
fees charged by
all funds to pay
the fund
manager
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Mutual Fund Quotes
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Funds
•
•
•
•
•
•
•
Growth
Aggressive Growth
Value
Equity-Income
Balanced
Growth & Income
Bond
•
•
•
•
Money Market
Index
Sector
Socially
Responsible
• International
• Asset Allocation
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Bond Funds
Government bond funds
Mortgage-backed bond funds
High-grade corporate bond funds
High-yield corporate bond funds
Convertible bond funds
Municipal bond funds
Intermediate-term bond funds
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Money Market Mutual Funds
General-purpose money funds
Tax-exempt money funds
Government securities money funds
All highly liquid, low risk
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Index Funds
Rather than beat the
market index funds try to
match the market
Index has a buy and hold
approach unless it alters its
“market basket”
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Sector Funds
Restricts investments to a particular
sector of the market
Popular sectors include real estate,
technology, financial services, natural
resources, electronics,
telecommunications, and health care
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Socially Responsible Funds
(SRFs)
Invest only in firms meeting
certain moral, ethical, or
environmental factors
Exclude tobacco, alcohol,
gambling, weapon contractors,
nuclear power plants
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Other Fund Types
International
Funds
• Most or all of its
investing is in
foreign securities
Asset Allocation
Funds
• Spread investor’s
money across
different market
types
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Services Offered by Mutual Funds
Automatic Investment Plan - fund periodically drafts
money from investor's bank account
Automatic Reinvestment Plan - earnings and
distributions automatically reinvested in additional
shares
Regular Income - fund automatically pays out
predetermined amount to investor
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reinvesting Income
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Services Offered by Mutual Funds
Conversion
Privileges
• shareholders
easily move from
one fund to
another within the
fund family
Retirement
Plans
• funds set up
and administer
retirement
plans
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Making Mutual Fund Investments
The Selection Process
Decide which funds to buy by assessing
your needs
Consider your investment objectives
What is your intended use of the fund
What services are important to you
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Measuring Fund Performance
Returns consist of:
Dividend income
Capital gains distributions
Change in fund's share price
Past performance does not
guarantee future returns
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Measuring Fund Performance
•
•
Return is made up of
–
net investment income fund earns from dividends
and interest
–
realized and unrealized capital gains fund earns
Mutual funds provide a standardized format
that highlights key income, expense, capital
gains information
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Income and Capital Changes
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Investing in Real Estate
Provides greater diversification
than holding just stocks or bonds
Less volatility than stocks
Doesn’t move in tandem with stocks
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Some Basic Considerations
• Cash flow and taxes
– Depreciation write-offs reduce taxes
– Passive investment
• Appreciation in value
• Use of leverage
– Borrowed money
magnifies returns
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Investing in Income Property
Commercial property
• Office buildings,
industrial space,
warehouses, retail
space, hotels
Residential property
• Homes, apartments,
small multifamily
buildings
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Other Ways to Invest in Real
Estate
Real Estate Investment Trusts (REITs)
• Closed-end investment companies holding real estate
• Offer diverse, marketable way to invest in real estate
–Equity REITs invest in properties
–Mortgage REITs invest in mortgages
–Hybrid REITs invest in both
Real estate limited partnerships (LLCs)
• Limited liability partnerships
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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