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Investing in Mutual Funds and Real Estate
#13
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Mutual Fund: Some Basics
• Financial services organization that receives money from shareholders and invests it on their behalf • Investors become part owners in a securities portfolio
More people invest in mutual funds than any other financial product
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The Mutual Fund Concept
Pooled diversification• Investors buy into a diversified
portfolio of securities for the collective benefit of individual investors
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Basic Mutual Fund Structure
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Why Invest in Mutual Funds
• Diversification• Professional
Management• Financial Returns • Convenience
But remember - No choice in securities selectionNo control over sale of securities within fund
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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
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Open-End Investment Companies• “Mutual fund” commonly denotes this type
of investment company• Shares purchased from and sold back to
company – not traded among individual investors
• New shares issued as money flows in• NAV is usually the quoted price
Types of Investment Companies
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Open-End versus Closed End
Open-End Investment Companies
• “Mutual fund” commonly denotes this type of investment company
• Shares purchased from and sold back to company
• New shares issued as money flows in
• NAV is quoted price
Closed-End Investment Companies
• Fixed number of shares• Trading between
investors in market• Shares are listed and
trade at a discount or premium to NAV
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Net value of all securities held in fund’s portfolio
Net Asset Value (NAV)
NAV =
current price of fund assets - liabilities
number of outstanding shares
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• 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
Exchange-Traded Funds (EFT)
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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
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Important Cost Considerations
• 12(b)-1 Fees - annual fees for marketing and promotion
• Management Fees - annual fees charged by all funds to pay the fund manager
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Types of Funds
• Growth• Aggressive Growth• Value• Equity-Income• Balanced• Growth & Income• Bond
• Money Market• Index • Sector• Socially
Responsible• International• Asset Allocation
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Bond Funds
• Government bond funds• Mortgage-backed bond funds• High-grade corporate bond funds• High-yield corporate bond funds• Convertible bond funds• Municipal bond funds• Intermediate-term bond funds
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Money Market Mutual Funds
• General-purpose money funds• Tax-exempt money funds• Government securities money funds
All highly liquid, low riskAll highly liquid, low risk
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Index Funds
• Rather than beat the market index funds try to match the market
• Buy and hold
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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
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Socially Responsible Funds
• Invests only in firms meeting certain moral, ethical, or environmental factors
• Exclude tobacco, alcohol, gambling, weapon contractors, nuclear power plants
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Other Fund Types
International Funds
• Most or all of its investing is in foreign securities
Asset Allocation Funds
• Spread investor’s money across different market types
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• Automatic Investment Plan - mutual fund periodically drafts money from investor's bank account
• Automatic Reinvestment Plan - fund earnings and distributions automatically reinvested in additional shares of fund
• Regular Income - fund automatically pays out predetermined amount to investor
Services Offered by Mutual Funds
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Reinvesting Income
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Conversion Privileges
• shareholders easily move from one fund to another within the fund family
Services Offered by Mutual Funds
Retirement Plans
• funds set up and administer retirement plans
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Making Mutual 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
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Measuring Fund Performance
Returns consist of • Dividend income • Capital gains distributions • Change in fund's share price
Past performance does not guarantee future returns
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Measuring Fund Performance
• Return is made up of – net investment income fund earns from
dividends and interest
– realized and unrealized capital gains fund earns
• Mutual funds provide a standardized format
that highlights key income, expense, capital
gains information
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Income and Capital Changes
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Investing in Real Estate
• Provides greater diversification than does holding just stocks or bonds
• Less volatility than stocks • Doesn’t move in tandem with stocks
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Some Basic Considerations
• Cash flow and taxes– Depreciation write-offs reduce taxes– Passive investment
• Appreciation in value• Use of leverage
– Borrowed money magnifies returns
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Investing in Income Property
Commercial property • Office buildings,
industrial space, warehouses, retail space, hotels
Residential property• Homes, apartments,
small multifamily buildings
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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
Other Ways to Invest in Real Estate