© 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 Mutual Funds and Real Estate
#13
© 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 exchange-traded 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
More people invest in mutual
funds than any other financial product
Financial services organization that receives money from shareholders and invests it on their behalf
Investors become part owners in a securities portfolio
© 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
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Basic Mutual Fund Structure
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Why Invest in Mutual Funds
But remember - No choice in securities selectionNo control over sale of securities within fund
Diversification
Professional Management
Financial Returns
Convenience
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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
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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
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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
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Types of Funds
• Growth• Aggressive Growth• Value• Equity-Income• Balanced• Growth & Income• Bond
• Money Market• Index • Sector• Socially
Responsible• International• Asset Allocation
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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
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Money Market Mutual Funds
All highly liquid, low risk
General-purpose money funds
Tax-exempt money funds
Government securities money funds
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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”
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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
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Socially Responsible Funds (SRFs)
Invest only in firms meeting certain moral, ethical, or environmental factors
Exclude tobacco, alcohol, gambling, weapon contractors, nuclear power plants
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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
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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
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Reinvesting Income
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Conversion Privileges
• shareholders easily move from one fund to another within the fund family
Services Offered by Mutual Funds
Retirement Plans
• funds set up and administer retirement plans
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Making Mutual Fund Investments
The Selection ProcessDecide 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
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Measuring Fund Performance
Returns consist of:
Past performance does not guarantee future returns
Dividend income
Capital gains distributions
Change in fund's share price
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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
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Income and Capital Changes
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Investing in Real Estate
Provides greater diversification than holding just stocks or bonds
Less volatility than stocks
Doesn’t move in tandem with stocks
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Some Basic Considerations
• Cash flow and taxes– Depreciation write-offs reduce taxes– Passive investment
• Appreciation in value• Use of leverage
– Borrowed money magnifies returns
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Investing in Income Property
Commercial property • Office buildings,
industrial space, warehouses, retail space, hotels
Residential property• Homes, apartments,
small multifamily buildings
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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
Other Ways to Invest in Real Estate
