Investing in Mutual Funds, Real Estate, and Other Choices
description
Transcript of Investing in Mutual Funds, Real Estate, and Other Choices
© 2010 South-Western, Cengage Learning
Chapter
© 2010 South-Western, Cengage Learning
Investing in Mutual Funds, Real Estate, and Other Choices
14.1 Investing in Mutual Funds14.2 Investing in Real Estate andOther Choices
14
© 2010 South-Western, Cengage Learning
Chapter 14
2
Lesson 14.1Investing in Mutual Funds
GOALS■ Discuss mutual
funds as an investment strategy.
■ Explain how to buy and sell mutual funds.
© 2010 South-Western, Cengage Learning
Chapter 14
3
Evaluating Mutual Funds
■ A mutual fund is a professionally managed group of investments bought using a pool of money from many investors.
■ Individuals buy shares in the mutual fund.
■ The fund managers use this pooled money to buy stocks, bonds, and other securities.
■ The kinds of securities they buy depend on the fund’s stated investment objectives.
© 2010 South-Western, Cengage Learning
Chapter 14
4
Advantages of Mutual Funds
■ Professionally managed■ Liquid■ Diversified■ Require only a small minimum investment
© 2010 South-Western, Cengage Learning
Chapter 14
5
Mutual Fund Risk
■ Growth funds■ Income funds■ Growth and income funds■ Money market funds■ Global funds■ Index funds
© 2010 South-Western, Cengage Learning
Chapter 14
6
Growth Funds
■ A growth fund is a mutual fund whose investment goal is to buy stocks that will increase in value over time.
© 2010 South-Western, Cengage Learning
Chapter 14
7
Income Funds
■ An income fund is a mutual fund whose investment goal is to produce current income in the form of interest or dividends.
© 2010 South-Western, Cengage Learning
Chapter 14
8
Growth and Income Funds
■ A growth and income fund is a mutual fund whose investment goal is to earn returns from both dividends and capital gains.
■ A balanced fund is a mutual fund that seeks both growth and income but attempts to minimize risk by investing in a mixture of stocks and bonds rather than stocks alone.
© 2010 South-Western, Cengage Learning
Chapter 14
9
Money Market Funds
■ A money market fund is a mutual fund that invests in safe, liquid securities, such as Treasury Bills and bonds that mature in less than a year.
© 2010 South-Western, Cengage Learning
Chapter 14
10
Global Funds
■ A global fund is a mutual fund that purchases international stocks and bonds as well as U.S. securities.
© 2010 South-Western, Cengage Learning
Chapter 14
11
Index Funds
■ An index is an average of the price movements of certain selected securities.
■ Investors use indexes as benchmarks for comparison to judge how well their investments are doing.
■ An index fund is a mutual fund that tries to match the performance of a particular index by investing in the companies included in that index.
© 2010 South-Western, Cengage Learning
Chapter 14
12
Risk and Return Pyramid
Money Market Funds
Income Funds
Growth andIncome Funds
GrowthFunds
Higher risk/higherreturn potential
Lower risk/lowerreturn potential
© 2010 South-Western, Cengage Learning
Chapter 14
13
Buying And Selling Mutual Funds
■ To choose the mutual fund that is right for you, you must know your own investment objectives and risk tolerance.
■ Do you want income from your investments now, or can you wait for capital gains in the future?
■ Do you need a tax-free or tax-deferred investment to reduce your current income taxes?
■ Are you comfortable with risking your investment for a chance at big returns, or do you prefer a safe but lower return?
© 2010 South-Western, Cengage Learning
Chapter 14
14
Number of SharesValue of Portfolio – Liabilities
=NAV
Net Asset Value
■ The net asset value tells you the market price for a share of a mutual fund.
■ The NAV is the total value of a fund’s investment portfolio minus its liabilities, divided by the number of outstanding shares.
© 2010 South-Western, Cengage Learning
Chapter 14
15
The Prospectus ■ The prospectus is a legal document that offers securities or mutual fund shares for sale.
■ It must contain the following:
■ The terms■ A summary of the fund’s
portfolio of investments■ The fund’s objectives■ Financial statements
showing past performance
© 2010 South-Western, Cengage Learning
Chapter 14
16
Costs and Fees
■ If you buy a mutual fund through a broker, you will likely have to pay a sales fee, called a load.
■ Front-end load■ Back-end load■ No-load fund
© 2010 South-Western, Cengage Learning
Chapter 14
17
The Mutual Fund Company■ You have no guarantees that a mutual fund will make money or
that the mutual fund company itself will not fail. ■ To reduce these risks, choose a mutual fund company that has
the following characteristics:■ It has been in business for 20 or more years■ It has a solid track record of returning good solid returns to investors■ It is a large company that manages investments for millions of
investors■ It is a well-known company that is highly respected among investment
advisers and experts■ It exists both in brick-and-mortar and in cyberspace■ It is customer friendly and responsive to customer questions and
needs■ It provides customers with easy-to-read statements and reports and
offers daily online access
© 2010 South-Western, Cengage Learning
Chapter 14
18
Sources of Mutual Fund Information
■ Financial publications■ Online
© 2010 South-Western, Cengage Learning
Chapter 14
19
Lesson 14.2Investing in Real Estate andOther Choices
GOALS■ Explain real estate investing, both direct and
indirect.■ Describe other investments, including metals,
gems, collectibles, and financial instruments.
© 2010 South-Western, Cengage Learning
Chapter 14
20
Real Estate Investing
■ When you invest in real estate, you are buying land and any buildings on it.
■ Advantage■ Investing in real estate is considered a good
way to combat inflation, because it usually increases in value over the years at rates equal to or higher than inflation.
■ Disadvantages■ Real estate is one of the least liquid
investments you can make, since a property can take months or even years to sell.
■ Some real estate investments are speculative and can result in a substantial loss.
© 2010 South-Western, Cengage Learning
Chapter 14
21
Buying Real Estate
■ With direct investments, the investor holds legal title to the property.
■ Examples of real estate properties you can buy directly:
■ Vacant land■ Single-family houses■ Rental properties■ Recreation and retirement property
© 2010 South-Western, Cengage Learning
Chapter 14
22
Vacant Land
■ Vacant land, or unimproved property, is usually considered a speculative investment.
■ Investors hold the property expecting it to go up substantially in value over time.
■ Other people purchase a vacant lot with plans for building a house on it later, either when they can afford it or at retirement.
■ Because it is considered speculative, banks are often unwilling to make loans on vacant land.
© 2010 South-Western, Cengage Learning
Chapter 14
23
Single-Family Houses
■ In addition to owning your own home, you might wish to purchase a single-family house and rent it to others.
■ You may find banks reluctant to grant you a mortgage loan to buy a house as rental property.
■ As a condition for a loan, you may have to make a larger down payment or pay a higher interest rate.
■ When a renter takes possession of your house, you still have responsibilities.
© 2010 South-Western, Cengage Learning
Chapter 14
24
Rental Properties
■ A duplex is a building with two separate living quarters.
■ A triplex (three units) and a quad (four units) are buildings with three or four individual housing units.
■ An apartment complex is a group of many apartments with common facilities such as recreation areas, clubhouses, and parking lots.
■ A condominium, or condo, is an individually owned unit in an apartment-style complex with shared ownership of common areas.
© 2010 South-Western, Cengage Learning
Chapter 14
25
Recreation and Retirement Property
■ Many people buy second homes for vacations or for their retirement years.
■ Often, the owners rent these properties out to others to generate income during the times when they are not using them.
■ Recreation property includes beach and mountain cabins and even vacant land near vacation sites such as rivers, lakes, or an ocean.
© 2010 South-Western, Cengage Learning
Chapter 14
26
Investing Indirectly
■ Real estate syndicates■ Real estate investment trusts (REITs)■ Participation certificates
© 2010 South-Western, Cengage Learning
Chapter 14
27
Buying and OwningRental Property
■ When buying real estate, most people make a down payment and get a mortgage to pay the balance.
■ A mortgage (also called a trust deed) is a loan to purchase real estate.
■ When you sell the property:■ You keep the difference between the sales price
and the mortgage. ■ This difference is the equity, or ownership interest.
© 2010 South-Western, Cengage Learning
Chapter 14
28
Monthly Payments
■ As your tenant makes rent payments, you make the mortgage payments to the bank.
■ You would use the difference between the amount of rent collected and the mortgage payment to pay property taxes and the cost of upkeep on the property.
■ Cash flow■ If you have money left over after paying
expenses, you have a positive cash flow. ■ If you cannot collect enough rent to pay
the mortgage, taxes, repairs, and maintenance, then you have a negative cash flow.
© 2010 South-Western, Cengage Learning
Chapter 14
29
Monthly Management■ To manage your property, you can:
■ Be a resident landlord■ Hire a resident landlord■ Hire a property manager
© 2010 South-Western, Cengage Learning
Chapter 14
30
Monthly Management
■ Resident landlord■ Lives at the rental site■ Takes care of all repairs and
maintenance, collects the rent, and assures suitable living conditions
■ Property manager ■ Collects rent, hires and pays people to
make repairs and maintain the property, charges a fee for his or her services, and remits the difference to the owner of the property.
■ Does do not live on site■ Might manage more than one property
(continued)
© 2010 South-Western, Cengage Learning
Chapter 14
31
Tax Advantages
■ Depreciation is the decline in the value of property due to normal wear and tear.
■ Property taxes and other expenses of maintaining rental property can be deducted to help reduce the taxes you have to pay on your rental income.
© 2010 South-Western, Cengage Learning
Chapter 14
32
Selling Rental Property
■ When you sell your property, you will have to pay taxes on the capital gain.
■ Real estate can be difficult to sell.
© 2010 South-Western, Cengage Learning
Chapter 14
33
Risks of Owning Rentals
■ Damage■ Vacancies■ Zoning laws and local use restrictions
© 2010 South-Western, Cengage Learning
Chapter 14
34
Metals, Gems, and Collectibles
■ Investments in this category are often speculative. ■ In some cases, the enjoyment of having the
investment will far exceed any resale value.■ Although not inexpensive, precious metals, gems,
and collectibles are easy to purchase. ■ However, they can be very difficult to sell in a
hurry and do not provide any current income.
© 2010 South-Western, Cengage Learning
Chapter 14
35
Precious Metals
■ Precious metals are tangible metals that have known and universal value around the world.
■ Gold, silver, and platinum are examples of precious metals.
■ Investments in precious metals are very risky because prices can swing widely over time.
© 2010 South-Western, Cengage Learning
Chapter 14
36
Gems and Jewelry
■ Gems are natural, precious stones, such as diamonds, rubies, sapphires, and emeralds.
■ Their prices are high and subject to drastic change.
© 2010 South-Western, Cengage Learning
Chapter 14
37
Collectibles
■ Collections of valuable or rare items, such as antiques, art, baseball cards, stamps, and comic books, are called collectibles.
■ They are valuable because they are old, no longer produced, unusual, irreplaceable, or of historic importance.
■ Coins are the most commonly collected items.■ Collectibles can be hard to sell and may not
increase in value.
© 2010 South-Western, Cengage Learning
Chapter 14
38
Financial Instruments
■ Futures■ Commodities■ Option
■ Call option■ Put option