1. © 2012 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 Mutual Funds and Real Estate #13

2. © 2012 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 Goals Describe features and operating characteristics of a mutual fund Differentiate between open-end, closed-end, and exchange- traded funds, discuss fund loads and charges Discuss types of funds and services offered by mutual fundsUnderstand variables when selecting fundsIdentify sources of return, calculate return on a mutual fund Understand the role of real estate in a diversified portfolio along with direct or indirect investing

3. © 2012 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 ETFs: Some Basics More people invest in mutual funds than any other financial product Financial services organization that receives money from shareholders and invests it on their behalf Investors become part owners in a securities portfolio

4. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Mutual Fund Concept Pooled diversification Investors buy into a diversified portfolio of securities for the collective benefit of individual investors

5. © 2012 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 Mutual Fund Structure

6. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why Invest in Mutual Funds But remember - No choice in securities selection No control over sale of securities within fund DiversificationProfessional ManagementFinancial ReturnsConvenience

7. © 2012 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 Each fund is a separate corporation or trust owned by shareholders Management company - runs daily operationsInvestment advisor - oversees portfolioDistributor - sells fund sharesCustodian - safeguards fund’s assets Transfer agent - executes transactions and maintains shareholder records

8. © 2012 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 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

9. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

10. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exchange-Traded Funds (EFTs) 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

11. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exchange Traded Funds

12. © 2012 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 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

13. © 2012 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 Fees - annual fees for marketing and promotion Management Fees - annual fees charged by all funds to pay the fund manager

14. © 2012 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 Fund Quotes

15. © 2012 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 Value Equity-Income Balanced Growth & Income Bond Money Market Index Sector Socially Responsible International Asset Allocation

16. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Bond Funds Government bond fundsMortgage-backed bond fundsHigh-grade corporate bond fundsHigh-yield corporate bond fundsConvertible bond fundsMunicipal bond fundsIntermediate-term bond funds

17. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Money Market Mutual Funds All highly liquid, low risk General-purpose money fundsTax-exempt money fundsGovernment securities money funds

18. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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”

19. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

20. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Socially Responsible Funds (SRFs) Invest only in firms meeting certain moral, ethical, or environmental factors Exclude tobacco, alcohol, gambling, weapon contractors, nuclear power plants

21. © 2012 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 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

22. © 2012 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 Automatic Investment Plan - fund periodically drafts money from investor's bank account Automatic Reinvestment Plan - earnings and distributions automatically reinvested in additional shares Regular Income - fund automatically pays out predetermined amount to investor

23. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reinvesting Income

24. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

25. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Making Mutual Fund Investments The Selection Process Decide which funds to buy by assessing your needs Consider your investment objectivesWhat is your intended use of the fundWhat services are important to you

26. © 2012 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 Returns consist of: Past performance does not guarantee future returns Dividend incomeCapital gains distributionsChange in fund's share price

27. © 2012 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 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

28. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income and Capital Changes

29. © 2012 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 Real Estate Provides greater diversification than holding just stocks or bonds Less volatility than stocksDoesn’t move in tandem with stocks

30. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Some Basic Considerations Cash flow and taxes –Depreciation write-offs reduce taxes –Passive investment Appreciation in value Use of leverage –Borrowed money magnifies returns

31. © 2012 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 Commercial property Office buildings, industrial space, warehouses, retail space, hotels Residential property Homes, apartments, small multifamily buildings

32. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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