Transcript Investing in Mutual Funds, Real Estate, and Other Choices

Investing in Mutual Funds, Real
Estate, and Other Choices
Personal Finance
Chapter 14
14.1 Investing in Mutual Funds
Notes
What are mutual funds?
 A professionally managed group of
investments bought using a pool of
money from many investors
14.1 Investing in Mutual Funds
Notes
Advantages of mutual funds
 Managed professionally
 Very liquid
 Diverse
 Small minimum investment
14.1 Investing in Mutual Funds
Notes
Mutual Fund Risk/Return Categories
 Growth funds – invest in common
stock of companies that will grow over
time rather than pay dividends today
 Income funds – provide maximum
dividends in the short run
 Growth and Income funds – earn
returns from both dividends and
capital gains.
 Money Market funds – invest in
short-term corporate obligations and
government securities, safe and liquid
14.1 Investing in Mutual Funds
Notes
Mutual Funds of Various Risk
Categories
Global Funds – mutual fund that
purchases international stocks and
bonds as well as U.S. securities
Index Funds – mutual fund that
tries to match the performance of a
particular index by investing in the
companies that are included in that
index – acts in the same way the
stock or bond markets do as a
whole
14.1 Investing in Mutual Funds
Notes
Evaluating Mutual Funds
Net Asset Value (NAV) – the total
value of a fund’s investment
portfolio minus its liabilities, divided
by the number of outstanding
shares of the fund
The Prospectus – a legal document
that offers securities or mutual fund
shares for sale
14.1 Investing in Mutual Funds
Notes
Evaluating Mutual Funds
Costs and Fees – when buying from a broker,
you will have to pay a sales fee called a load
 Front-end load – commission paid when
funds are purchased
 Back-end load – commission paid when
funds are sold
 No-end load – commission is not charged
Print and Online Sources of Mutual Fund
Information
 Forbes, Fortune, and Money review and rank
mutual funds
Check Your Understanding P. 331
1) Why might you chose a mutual
fund over investing directly in
stocks?
 Most mutual fund companies offer a
family of funds covering a whole
range of investment objectives.
 This helps achieve diversification.
 Funds are managed by
professionals.
Check Your Understanding P. 331
2) What is the net asset value and
how is it computed?
 Net asset value is the total value of
a fund’s investment portfolio minus
its liabilities, divided by the number
of shares of the fund outstanding.
Value of Portfolio- Liabilities
NAV 
Number of Shares
14.2 Investing in Real Estate and Other
Choices Notes
Direct Real Estate Investments
Vacant Land – speculative investment
for building on at a later date
Single-Family Houses – not owneroccupied
Duplexes – a building with two living
quarters
Apartments – multi-unit building
Condominiums – individually owned
apartment with shared common areas
Recreation and Retirement Property
– second homes for vacation or
retirement
14.2 Investing in Real Estate and Other
Choices Notes
Indirect Real Estate Investments
 Real Estate Syndicates – a group of
investors who pool their money to buy
high-priced real estate
 Real Estate Investment Trusts
(REITs) – a corporation that pools the
money of many individuals to invest in
real estate
 Participation Certificates – an
investment in a pool of mortgages that
have been purchased by a government
14.2 Investing in Real Estate and Other
Choices Notes
Owning and Managing Rental Property
 A mortgage is a loan to purchase real estate
 Leverage is borrowing money to buy an
investment
 Equity is the difference between the sales
price and the mortgage
 Money you have leftover after paying your
expenses means that you have a positive
cash flow
 If you do not have enough money to pay
your expenses that means you have a
negative cash flow
14.2 Investing in Real Estate and Other
Choices Notes
Investing in Metals, Gems, and
Collectibles
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Gold, silver, and platinum are precious
metals
Diamonds, rubies and sapphires are
precious stones called gems
Collections of valuable or rare items from
antiques to comic books are collectibles
Coins are the most commonly collected
item
14.2 Investing in Real Estate and Other
Choices Notes
Investing in Financial Instruments
 Futures – contracts to buy and sell
commodities or stocks for a specified
price on a specified date in the future
 Option – the right, but not the
obligation, to buy and sell a
commodity or stock for a specified
price within a specified time period
 Call option – the right to buy stock at
a set price by a certain expiration date
 Put option – the right to sell stock at
a fixed price until the expiration date
14.2 Checking Your Understanding,
P. 339
1)
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What are some advantages of
owning real estate?
Real estate is often a good way to
combat inflation
It usually increases in value over
the years
Often at rates higher than inflation
14.2 Checking Your Understanding,
P. 339
2) Why are collectibles risky
investments?
 Collectibles can be hard to sell
 They are considered illiquid
14.2 Checking Your Understanding,
P. 339
3) Explain how futures contracts work.
 Contracts to buy and sell commodities or
stocks for a specified price on a specified
date in the future
 In a futures market, a commodity is not
physically needed for trading
 The futures market was created so you
can know in advance what you will be
paid
Review Facts and Ideas, P. 342
1) What determines the kinds of
securities a mutual fund manager
will buy?
 Interpretations of market
conditions
 Economic conditions
 Trends
 Other factors
Review Facts and Ideas, P. 342
2) Give some advantages of buying
mutual funds rather than individual
stocks or bonds.
 Mutual funds can be purchased
with smaller, regular payments
 The rate of return is often quite
good, although there is more risk
 The investor does not have to
make decisions and can rely on the
expertise of professional managers
Review Facts and Ideas, P. 342
3) Identify and describe four broad risk/return
categories of mutual funds.

Growth funds – invest in common stock of
companies that will grow over time rather
than pay dividends today

Income funds – provide maximum
dividends in the short run

Growth and Income funds – earn returns
from both dividends and capital gains.

Money Market funds – invest in shortterm corporate obligations and government
securities, safe and liquid
Review Facts and Ideas, P. 342
4) What is the meaning of a mutual
fund’s NAV?
 The total value of a fund’s
investment portfolio minus its
liabilities, divided by the number of
outstanding shares of the fund
Review Facts and Ideas, P. 342
5) Explain the difference between a
front- or back-end load fund and a
no-load fund.
 Front-end load – commission paid
when funds are purchased
 Back-end load – commission paid
when funds are sold
 No-end load – commission is not
charged
Review Facts and Ideas, P. 342
6) What kinds of comparisons among
mutual funds can you find in print
and online publications?
 Rankings of 1-yr, 5-yr and 10-yr
performance
 Ranking by category – income vs.
other income funds and growth
funds vs. other growth funds
Review Facts and Ideas, P. 342
7) Describe three investments you
could make that would earn you
rental income.
 Single-family homes
 Duplexes
 Condominiums
 Apartments
Review Facts and Ideas, P. 342
8) Why do many people join
investment groups rather than
purchase real estate individually?
 Smaller investments in larger
properties
 Individuals do not have to make
decisions alone
 Decisions can be made based on
professional expertise
Review Facts and Ideas, P. 342
9) As the owner of rental property,
what responsibilities would you
have toward your tenants?
 Real estate must be in livable
condition – heat, water, electrical
wiring, working windows and
doors, appliances
 As defined in the rental/lease
agreement
Review Facts and Ideas, P. 342
10) How can vacancies in an
apartment building you own affect
you?
 If you cannot collect rent to pay
the mortgage, property taxes,
repairs, and maintenance, you
make up the shortfall from your
own pocket or risk ruining your
credit rating
Review Facts and Ideas, P. 342
11) List some disadvantages to
owning real estate.
 Real estate may take some time to
sell
 Renters pay only a small fraction of
its worth
 Renters can damage the property
 The owner must infuse cash into
the investment in order to
expenses
Review Facts and Ideas, P. 342
12) Why are investments in precious
metals, gems, and collectibles
risky?
 Many collectibles do not maintain
their value and can become
worthless in the marketplace
 There is no systematic way to
predict which collectibles will rise
and which will fall in value
Review Facts and Ideas, P. 342
13) What are some advantages and
disadvantages of collections as
investments?
 Advantages – can be purchased in
small quantities over time – can
appreciate in value
 Disadvantages – may lose value –
may be difficult to sell
Review Facts and Ideas, P. 342
14) Why might farmers choose to sell
their commodities on the futures
market?
 Farmers might elect to hold their
commodities in a futures market
because prices may be higher at a
later date, when supply is lower
Review Facts and Ideas, P. 342
15) Explain the difference between
put and call options.
 A put option – the right to sell
stock at a fixed price until the
expiration date of the option
 A call option – the right to buy
stock at a set price by a certain
expiration date