chapter #14 “investing in mutual funds, real estate, and other choices

CHAPTER #14 “INVESTING IN MUTUAL FUNDS, REAL ESTATE, AND OTHER CHOICES

Day #1 Learning Targets – Mutual Funds

1. Explain what mutual funds are and their advantages.

2. Identify different mutual fund categories and their corresponding risk/return.

What are Mutual Funds?

Mutual Fund -

Professionally managed group of investments bought using a pool of money from many investors

Funds have different stated objectives

Stocks Bonds

Money Markets

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What are Mutual Funds?

Family of Funds -A variety of funds covering a whole

range of investment objectives

American Funds

How you earn money?

1. Capital Gain2. Dividend Payments

Initial Investment varies:

$500 to $3,000 or more

Advantages of Mutual Funds

1. Convenience of Professional Management

2. Investment is Liquid3. Diversification4. Need not a lot of money to invest

Mutual Fund Risk/Return CategoriesGrowth Fund -

Mutual fund whose investment goal is to buy stocks that will increase in value over time

Aggressive Growth Fund -

Invests in stock of new or out-of-favor companies and industries that the fund managers think will achieve above-average increases in value.

Mutual Fund Risk/Return CategoriesIncome Fund -

Mutual fund whose investment goal is to invest in bonds that produce current income in the form of interest

• Looking for income now rather than capital gains later

• Some specialize in tax-exempt bonds ---- with the goal of tax free income for investors

Mutual Fund Risk/Return CategoriesGrowth and Income Fund -

Mutual fund whose investment goal is to earn returns from both dividends and capital gains.

Balanced Fund -

Mutual fund whose investment goal is to earn returns from both dividends and capital gains.

Invest in a mixture of stocks and bonds rather than just stocks alone

Mutual Fund Risk/Return CategoriesMoney Market Funds -

Invests in safe, liquid securities, such as Treasury Bills and bonds that mature in three weeks to six months

• Provides modest current income with little risk.

• Preservation of principal and high liquidity.

Mutual Funds of Various Risk Categories

Global Funds -A mutual fund that purchases international

stocks and bonds as well as U.S. securities

• Varies in risk depending on the goal of the fund• Other factors like currency exchange and political

instability make these a slight bit riskier• Often stocks of companies in “Emerging

Markets”

Mutual Funds of Various Risk Categories

Index Funds -A mutual fund that tries to match the

performance of a particular index by investing in companies included in that index

• Matches the risk of that particular index• Examples: Dow Jones or Nasdaq

CompositeETF – Exchange Traded Fund

• Like a mutual fund that can be bought and sold in the market place

End Day 1

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Day #2 Learning Targets

3. Students will explain how mutual funds are valued and the different costs and fees that need to be considered.

4. Students will compute return on investment on a mutual fund.

Evaluating Mutual Funds

Net Asset Value (NAV)-Total value of a fund’s investment portfolio

minus its liabilities, divided by the number of outstanding shares of the fund

• Unlike stocks, it is not determined by what people are willing to pay for them….it is determined by the value of the assets in the fund.

• NAV = Value of the Portfolio – Liabilities / by the Number of Shares

• Calculated at the end of each business day• Always examine costs and fees compared to other

funds with similar objectives

Evaluating Mutual Funds

The Prospectus - Legal document that offers securities

of mutual fund shares for sale.• Contains terms, a summary of the fund’s

portfolio of investments, objectives, and financial statements showing past performance

Evaluating Mutual Funds

Load - Sales fee

COSTS AND FEES

Front-end Load - Sales charge paid when you buy and investment

Back-end Load - Sales charge paid when you sell the investment

• 2 – 8 % of the value of the shares purchased

Evaluating Mutual Funds

COSTS AND FEES

No-Load Fund - Does not charge a sales fee when you buy or sell because no salespeople are involved

Companies make money by charging fees for the professional management they provide.

Annual management fee - 1.5 % of the fund’s total assets

Evaluating Mutual Funds

COSTS AND FEES

12b-1 fee - Defrays the cost of marketing and distributing the fund

Expense ratio - Percentage of assets deducted each year for fund expenses

• Published with their fund descriptions• Compare expense ratios when

evaluating mutual funds

Evaluating Mutual Funds

PRINT AND ONLINE SOURCES OF MUTUAL FUND INFORMATION

• Publications – Forbes, Fortune, and Money magazines

• www.morningstar.com - issues reports that compare mutual funds

• Yahoo Finance• Vanguard, Fidelity, and Dreyfus

End Day 2

Day #3 Learning Target – Real Estate

#5 - Students will explain how real estate is an investment and the various ways to invest in real estate.

Investing in Real Estate

3 Main Types:

1. Direct Real Estate Investment2. InDirect Real Estate Investment3. Owning and Managing Rental Properties

Direct Real Estate Investment

Real Estate -Land and any buildings on it.

• Good way to combat inflation• Not very liquid• Can be speculative

Commercial Property -

Land and buildings that produce lease or rental income.

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Direct Real Estate Investment

Vacant Land

• Investors hold property expecting it to go up substantially in value

Single-Family Houses

• Purchased and used as rental property• Not owner occupied, banks usually

require a larger down payment, or a higher interest rate

Direct Real Estate Investment

Duplexes, Apartments, and Condominiums

An individually owned unit in an apartment-style complex with shared ownership of common areas.

Duplex - Building with two separate living quarters

Condominium -

Direct Real Estate Investment

Recreation and Retirement Property

• Lake property, mountain cabins, beach houses, and etc.

InDirect Real Estate Investment

Trustee - Individual or institution that manages assets for someone else

InDirect Real Estate Investment

Real Estate Investment Trust (REIT) -

Similar to a mutual fund, corporation that pools the money of many individuals to invest in real estate.

• Traded over markets• Dividends paid – 90% of profit must be

given back to investors• Types of investments include:

• Rental Properties• Mortgages• Commercial Property VIDEO

Owning and Managing Rental Properties

Mortgage - Loan to purchase real estate

Leverage - Borrowing money to buy and investment

• Mortgage is a type of leverage

Equity - Difference between the sales price and mortgage amount

Owning and Managing Rental Properties

Depreciation - Decline in value of property due to normal wear an tear

• Deductible from taxes, helps to offset rental income

- When property is sold you pay taxes on the capital gain

Owning and Managing Rental Properties

What are some dangers of rental property?• Damage from renters• Vacancies

Mortgage Calculator

End Day 3

Day #4 Learning Target – Speculation

#6 - Identify different speculative investments and understand the risk associated with them.

Investing in Metals, Gems, and Collectibles

Precious metals - Gold, silver, and platinum• Large swings in value, risky

Gems - Precious stones, diamonds, rubies, sapphires, and emeralds

Collectibles - Comic books, baseball cards, stamps

• Jewelry, mark-up of 50 to 500%

• Hard to sell• Tough to locate a buyer who is willing to buy

the collection

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Investing in Metals, Gems, and Collectibles

Speculative Investments

• Easy to purchase, tough to sell• No current income

Investing in Financial Instruments

Futures - Contracts to buy and sell commodities or stocks for a specified price on a specified date in the future.

• Risky because of unpredictable circumstances

• Farmers enter for protection against volatile prices

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Investing in Financial Instruments

Options - The right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time period

Call Option - The right to buy 100 shares of stock at a set price by a certain expiration date.

Put Option - The right to sell 100 shares of stock at a set price by a certain expiration date.

End Day 4

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