Investing in Mutual Funds, Exchange traded funds, and Real Estate #13

The Mutual Fund Concept Investors buy into a diversified portfolio of securities for the collective benefit of individual investors Pooled diversification

Basic Mutual Fund Structure

Why Invest in Mutual Funds Diversification Professional Management Financial Returns Convenience But remember - No choice in securities selection and no control over sale of securities within fund

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

Net Asset Value (NAV) Net value of all securities held in fund’s portfolio NAV = current price of fund assets - liabilities number of outstanding shares

Exchange-Traded Funds (ETFs) 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

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

Important Cost Considerations 12(b)-1 Fees - annual fees for distribution and marketing Management Fees - annual fees charged by all funds to pay the fund manager

Money Market Mutual Funds General-purpose money funds Tax-exempt money funds Government securities money funds All highly liquid, low risk

Index Funds Rather than beat the market index funds try to match the market Index has a buy and hold approach unless it alters its “market basket”

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

Socially Responsible Funds (SRFs) Invest only in firms meeting certain moral, ethical, or environmental factors Exclude tobacco, alcohol, gambling, weapon contractors, nuclear power plants

Services Offered by Mutual Funds Automatic Investment Plan Automatic Reinvestment Plan Regular Income - fund automatically pays out predetermined amount to investor

Services Offered by Mutual Funds Conversion (or exchange) Privileges shareholders easily move from one fund to another within the fund family Retirement Plans funds set up and administer retirement plans

Making Mutual Fund and Exchange Traded 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

Measuring Fund Performance Returns consist of: Past performance does not guarantee future returns Dividend income Capital gains distributions Change in fund's share price

Investing in Real Estate Provides greater diversification than holding just stocks or bonds Less volatility than stocks

Some Basic Considerations Cash flow and taxes Depreciation write-offs reduce taxes Passive investment Appreciation in value Use of leverage Borrowed money magnifies returns

Investing in Income Property Commercial property Office buildings, industrial space, warehouses, retail space, hotels Residential property Homes, apartments, small multifamily buildings

Other Ways to Invest in Real Estate 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