PFIN 13 Investing in Mutual Funds, ETFs and Real Estate 4 GITMAN/ JOEHNK/ BILLINGSLEY 4 13 Investing in Mutual Funds, ETFs and Real Estate Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES Describe basic features and operating characteristics of a mutual funds and exchange traded funds Differentiate between open- and closed-end mutual funds as well as exchange traded funds, and discuss the various types of fund loads and charges Discuss types of funds available to investors and the different kinds of investors services offered by mutual funds and exchange traded funds PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES (continued) Gain an understanding of the variables that should be considered when selecting funds for investment purposes Identify the sources of return and calculate rate of return earned on an investment in a mutual fund as well as evaluate the performance of an exchange traded fund Understand the role that real estate plays in a diversified investment portfolio along with basics of investing in real estate, either directly or indirectly PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Mutual Funds and Traded Funds Financial services organization that receives money from its shareholders Invests funds in a diversified portfolio of securities Exchange traded fund (ETF) Investment company whose shares trade on stock exchanges Shares can be bought and sold throughout the day PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exhibit 13.1 Basic Mutual Fund Structure PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Reasons for Investing in Mutual Funds or ETFs Achieve diversification in the investment holdings Obtain services of professional money managers Pooled diversification: Investors buy into a diversified portfolio of securities for the collective benefit of individual investors Generate rate of return on the investment capital Offer convenience PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

How Mutual Funds are Organized and Run Management company - Runs daily operations Investment advisor - Oversees portfolio Distributor - Sells the fund shares Custodian - Safeguards the securities and other fund assets Transfer agent - Executes transactions and maintains other records PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Open-End versus Closed-End Funds Open-end investment company Issues unlimited number of shares that it buys and sells at a price based on the current market value of the securities Net asset value (NAV): Current market value of all the securities the fund owns, less liabilities, on a per-share basis Closed-end investment company Issues a fixed number of shares which are themselves listed and traded share of stock PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Structured as index funds ETFs Structured as index funds Offer professional money management of mutual funds Provide liquidity of an exchange traded stock Distributors can create new shares or redeem old shares Contain higher costs, portfolio turnover and taxes when managed actively PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Important Cost Considerations Load fund: Charges a fee at purchase Low: Consists a low purchase fee Back-end: Commission charged for redeeming fund shares No-load fund: Involves no transaction fees charged PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Important Cost Considerations 12(b)-1 Fee: Annual fee used to offset the promotion and selling expenses Management fee: Paid to the professional money managers who administer a mutual fund’s portfolio PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Funds Growth Aggressive growth Aims for capital appreciation Involves risk exposure Viewed as long-term investment vehicles Aggressive growth Highly speculative investment vehicles Seek large profits from capital gains Volatile in nature PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Funds Value Equity-Income Invest in stocks that are considered to be undervalued by the market Equity-Income Emphasize current income Aim to preserve the capital Viewed as low-risk way of investing in stocks PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Funds Balanced Growth-and-Income Hold a balanced portfolio of stocks and bonds Generate well-balanced return of current income and long-term capital gains Confine investing to high-grade securities Growth-and-Income Confine investing to high-quality issues Involve risk due to their emphasis on stocks and capital gains PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Funds Bond Invest in various kinds of fixed-income securities Advantages More liquid Offer a cost-effective way of achieving a high degree of diversification Automatically reinvest interest and other income PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Funds Index Sector Buys and holds a portfolio of stocks equivalent to those in a market index Sector Restricts investments to particular sector of the market PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Funds Money market General purpose: Invests in virtually any type of short-term investment vehicle Tax-exempt: Limits its investments to short-term, tax-exempt municipal securities Government securities: Limits its investments to short-term securities of the U.S. government and its agencies PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

International fund: Invest in foreign securities Asset allocation Types of Funds Socially responsible: Invest only in companies meeting social, ethical, and/or environmental criteria International fund: Invest in foreign securities Asset allocation Spread investors’ money across all different types of markets PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Services Offered by Mutual Funds Enables investor to channel a set amount of money systematically into a given mutual fund Automatic investment plan Gives shareholders the option of electing to have dividends and capital gains distributions reinvested in additional fund shares Automatic reinvestment plan Systematic withdrawal plan: Allows shareholders to be paid specified amounts of money each period Regular income PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Services Offered by Mutual Funds Allows investors to switch from one mutual fund to another within in a family of funds Conversion privileges Permitted by government legislations for diverting a part of income of a self-employed individual Retirement plans PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Selection Process for Making Mutual Fund and ETF Investments Identify objectives and motives for using funds Recognize what funds have to offer Eliminate the alternatives Evaluate funds investment performance Stick with no-load or low-load mutual funds PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Measuring Fund Performance Sources of return Dividend income Capital gains distributions Change in fund's share price Evaluating ETF performance Reason for investing in an index based ETF is to replicate the performance of the index Determined by R-Squared statistical measure PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Basic Considerations of Investing in Real Estate Factors affecting the value of real estate investments Cash flow and taxes Appreciation in value Use of leverage PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Speculating in Raw Land Investors seek to generate high rates of return by investing in a property hoping it will increase in value Involves high risk PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Investing in Income Property Income-producing property Purchased for renting to generate periodic income in the form of rent receipts Commercial properties Office buildings, industrial space, and warehouses to retail space and hotels Risk and returns are tied to business conditions and location PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Investing in Income Property Residential properties Homes, apartments, and smaller multifamily buildings Profitability is influenced by the occupancy rates Other factors to be considered Location Local regulations Supply and demand trends PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Other Ways to Invest in Real Estate Real estate investment trust (REIT) Accumulates money, by selling shares to investors to invest in various forms of real estate Types Equity Mortgage Hybrid PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Other Ways to Invest in Real Estate Limited partnerships (LPs) Managers assume the role of general partner with unlimited liability Other investors are limited partners legally liable only for the amount of their initial investment Limited liability companies (LLCs) Includes a managing member and other members without any liability PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

KEY TERMS Mutual fund Exchange traded fund (ETF) Pooled diversification Open-end investment company Net asset value (NAV) Closed-end investment company Load fund Low-load fund Back-end load fund No-load fund 12(b)-1 fee Management fee General-purpose money fund Tax-exempt money fund Government securities money fund Socially responsible fund (SRF) International fund PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

KEY TERMS Automatic investment plan Automatic reinvestment plan Systematic withdrawal plan Conversion (or exchange) privilege Income-producing property Real estate investment trust (REIT) PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Mutual funds are invested in a diversified portfolio of securities SUMMARY Mutual funds are invested in a diversified portfolio of securities ETF shares are traded on stock exchanges Open-end investment companies issue unlimited number of shares at a price based on the current market value of the securities Closed-end investment companies issue a fixed number of shares which are listed and traded PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

SUMMARY Types of funds Growth, aggressive growth, value, equity-income, balanced, growth-and-income, bond, money market mutual funds, index, sector, socially responsible, international, and asset allocation Variables to be considered while making mutual funds and ETF investments Identify objectives and motives for using funds, recognize what the funds have to offer, eliminate the alternatives, and stick with no-load or low-load mutual funds PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Factors that affect the value of real estate investments SUMMARY Sources of return Dividend income, capital gains distributions, and change in fund's share price Factors that affect the value of real estate investments Cash flow and taxes Appreciation in value Use of leverage PFIN4 | CH13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.