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© 2010 South-Western, Cengage Learning

Chapter


Investing in Mutual Funds, Real Estate, and Other Choices

14.1 Investing in Mutual Funds14.2 Investing in Real Estate andOther Choices

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Lesson 14.1Investing in Mutual Funds

GOALS■ Discuss mutual

funds as an investment strategy.

■ Explain how to buy and sell mutual funds.


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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.


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Advantages of Mutual Funds

■ Professionally managed■ Liquid■ Diversified■ Require only a small minimum investment


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Mutual Fund Risk

■ Growth funds■ Income funds■ Growth and income funds■ Money market funds■ Global funds■ Index funds


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Growth Funds

■ A growth fund is a mutual fund whose investment goal is to buy stocks that will increase in value over time.


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Income Funds

■ An income fund is a mutual fund whose investment goal is to produce current income in the form of interest or dividends.


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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.


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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.


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Global Funds

■ A global fund is a mutual fund that purchases international stocks and bonds as well as U.S. securities.


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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.


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Risk and Return Pyramid

Money Market Funds

Income Funds

Growth andIncome Funds

GrowthFunds

Higher risk/higherreturn potential

Lower risk/lowerreturn potential


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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?


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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.


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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


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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


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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


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Sources of Mutual Fund Information

■ Financial publications■ Online


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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.


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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.


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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


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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.


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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.


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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.


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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.


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Investing Indirectly

■ Real estate syndicates■ Real estate investment trusts (REITs)■ Participation certificates


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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.


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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.


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Monthly Management■ To manage your property, you can:

■ Be a resident landlord■ Hire a resident landlord■ Hire a property manager


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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)


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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.


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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.


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Risks of Owning Rentals

■ Damage■ Vacancies■ Zoning laws and local use restrictions


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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.


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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.


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Gems and Jewelry

■ Gems are natural, precious stones, such as diamonds, rubies, sapphires, and emeralds.

■ Their prices are high and subject to drastic change.


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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.


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Financial Instruments

■ Futures■ Commodities■ Option

■ Call option■ Put option