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#13 Investing in Mutual Funds, Exchange traded 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. 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 and 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. 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 (ETFs) • 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. 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 distribution and marketing • 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. 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. Services Offered by Mutual Funds Automatic Investment Plan Automatic Reinvestment Plan 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. Services Offered by Mutual Funds Conversion (or exchange) 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 and Exchange Traded 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. Investing in Real Estate Provides greater diversification than holding just stocks or bonds Less volatility than 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.