Investing in Mutual Funds, Real Estate, and Other Choices

1. 14 Investing in Mutual Funds, Real Estate, and Other Choices 14.1 Investing in Mutual Funds 14.2 Investing in Real Estate andOther Choices

2. Lesson 14.1Investing in Mutual Funds GOALS • Discuss mutual funds as an investment strategy. • Explain how to buy and sell mutual funds. • 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. • Chapter 14

4. Advantages of Mutual Funds • Professionally managed • Liquid • Diversified • Require only a small minimum investment • Chapter 14

5. Mutual Fund Risk • Growth funds • Income funds • Growth and income funds • Money market funds • Global funds • Index funds • 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. • 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. • 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. • 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. • Chapter 14

10. Global Funds • A global fund is a mutual fund that purchases international stocks and bonds as well as U.S. securities. • 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. • Chapter 14

12. Higher risk/higher • return potential Risk and Return Pyramid • Growth • Funds • Growth and • Income Funds • Income Funds • Lower risk/lower • return potential • Money Market Funds • 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? • Chapter 14

14. Number of Shares • Value of Portfolio – Liabilities Net Asset Value • NAV • = • 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. • 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 • 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 • 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 • Chapter 14

18. Sources of Mutual Fund Information • Financial publications • Online • 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. • 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. • 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 • 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. • 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. • 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. • 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. • Chapter 14

26. Investing Indirectly • Real estate syndicates • Real estate investment trusts (REITs) • Participation certificates • 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. • 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. • Chapter 14

29. Monthly Management • To manage your property, you can: • Be a resident landlord • Hire a resident landlord • Hire a property manager • Chapter 14

30. Monthly Management • (continued) • 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 • 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. • 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. • Chapter 14

33. Risks of Owning Rentals • Damage • Vacancies • Zoning laws and local use restrictions • 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. • 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. • 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. • 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. • Chapter 14

38. Financial Instruments • Futures • Commodities • Option • Call option • Put option • Chapter 14