1. © 2010 South-Western, Cengage Learning Chapter © 2010 South-Western, Cengage Learning Investing in Mutual Funds, Real Estate, and Other Choices 14.1Investing in Mutual Funds 14.2Investing in Real Estate and Other Choices 14

2. © 2010 South-Western, Cengage Learning Chapter 14 2 Lesson 14.1 Investing in Mutual Funds GOALS ■Discuss mutual funds as an investment strategy. ■Explain how to buy and sell mutual funds.

3. © 2010 South-Western, Cengage Learning 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.

4. © 2010 South-Western, Cengage Learning EXAMPLE ■Since mutual funds are managed by professionals who select the stocks, bonds & securities, you pick different packages or portfolios for investments. Mutual Fund AMutual Fund B - 20% IBM-10 % IBM -10 % Ford-30 % P&G -30 % S&P 500-40 % S&P 500 -20 % Penny Stocks-10 % Penny Stocks -20 % Bonds =100 %-10 % Bonds =100 % *Investors share in capitial gains: profits made by managers who sell securities for more then they paid for them.

5. © 2010 South-Western, Cengage Learning Chapter 14 5 Advantages of Mutual Funds ■Professionally managed- Certified Financial Planners ■Liquid- Turning investment into cash easily ■Diversified- Can buy more risk, moderate, conservative ■Require only a small initial investment

6. © 2010 South-Western, Cengage Learning Chapter 14 6 Types of Mutual Fund Risk ■Growth funds ■Income funds ■Money market funds ■Global funds

7. © 2010 South-Western, Cengage Learning Chapter 14 7 Growth Funds ■A growth fund is a mutual fund whose investment goal is to buy stocks that will increase in value over time. ■Are more aggressive and can be risky depending on fund.

8. © 2010 South-Western, Cengage Learning Chapter 14 8 Income Funds Income fund: a mutual fund whose investment goal is to produce current income in the form of interest or dividends. -Low-moderate risk -Some can specialize in tax-exempt bonds *Balanced fund: a mutual fund that seeks both growth and income This attempts to minimize risk by investing in a mixture of stocks and bonds rather than stocks alone.

9. © 2010 South-Western, Cengage Learning 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. ■Some investors will put money here as they “wait out” economic conditions.

10. © 2010 South-Western, Cengage Learning Chapter 14 10 Risk and Return Pyramid Money Market Funds Income Funds Growth and Income Funds Growth Funds Higher risk/higher return potential Lower risk/lower return potential

11. © 2010 South-Western, Cengage Learning Chapter 14 11 Global Funds ■A global fund is a mutual fund that purchases international stocks and bonds as well as U.S. securities. ■Fluctuates in risk and return. Can depend on current exchange rates & political instability of other countries

12. © 2010 South-Western, Cengage Learning Chapter 14 12 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?

13. © 2010 South-Western, Cengage Learning Chapter 14 13 Number of Shares Value of Portfolio – Liabilities =NAV Net Asset Value ■Unlike stocks, mutual funds are not determined by what people are willing to pay for them. This is called the 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.

14. © 2010 South-Western, Cengage Learning Chapter 14 14 The Prospectus ■The prospectus is a legal document that offers securities or mutual fund shares for sale. ■By law 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

15. © 2010 South-Western, Cengage Learning Chapter 14 15 Costs and Fees ■If you buy a mutual fund through a broker, you will likely have to pay a sales fee, called a load. ■Choose a Mutual Fund Company that has a solid track record, well-known, rather large to ensure many of managers for investing & has been in business for several years (20 or more).

16. © 2010 South-Western, Cengage Learning

17. Chapter 14 17 Lesson 14.2 Investing in Real Estate and Other Choices GOALS ■Explain real estate investing, both direct and indirect. ■Describe other investments, including metals, gems, collectibles, and financial instruments.

18. © 2010 South-Western, Cengage Learning Chapter 14 18 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.

19. © 2010 South-Western, Cengage Learning Chapter 14 19 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

20. © 2010 South-Western, Cengage Learning Chapter 14 20 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.

21. © 2010 South-Western, Cengage Learning Chapter 14 21 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.

22. © 2010 South-Western, Cengage Learning Chapter 14 22 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.

23. © 2010 South-Western, Cengage Learning Chapter 14 23 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.

24. © 2010 South-Western, Cengage Learning Chapter 14 24 Investing Indirectly ■Real estate syndicates ■Real estate investment trusts (REITs) ■Participation certificates

25. © 2010 South-Western, Cengage Learning Chapter 14 25 Buying and Owning Rental 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.

26. © 2010 South-Western, Cengage Learning Chapter 14 26 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.

27. © 2010 South-Western, Cengage Learning Chapter 14 27 Monthly Management ■To manage your property, you can: ■Be a resident landlord ■Hire a resident landlord ■Hire a property manager

28. © 2010 South-Western, Cengage Learning Chapter 14 28 Monthly Management ■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 (continued)

29. © 2010 South-Western, Cengage Learning Chapter 14 29 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.

30. © 2010 South-Western, Cengage Learning Chapter 14 30 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.

31. © 2010 South-Western, Cengage Learning Chapter 14 31 Risks of Owning Rentals ■Damage ■Vacancies ■Zoning laws and local use restrictions

32. © 2010 South-Western, Cengage Learning Chapter 14 32 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.

33. © 2010 South-Western, Cengage Learning Chapter 14 33 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.

34. © 2010 South-Western, Cengage Learning Chapter 14 34 Gems and Jewelry ■Gems are natural, precious stones, such as diamonds, rubies, sapphires, and emeralds. ■Their prices are high and subject to drastic change.

35. © 2010 South-Western, Cengage Learning Chapter 14 35 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.

36. © 2010 South-Western, Cengage Learning Chapter 14 36 Financial Instruments ■Futures ■Commodities ■Option ■Call option ■Put option