1. PFIN 13 Investing in Mutual Funds, ETFs and Real Estate 4
GITMAN/ JOEHNK/ BILLINGSLEY 4 13
Investing in Mutual Funds, ETFs and Real Estate
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2. 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
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3. 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
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4. 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
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5. Exhibit 13.1 Basic Mutual Fund Structure PFIN4 | CH13
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6. 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
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7. 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
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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
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18. 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
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19. 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
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20. 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
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21. 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
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22. 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
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23. 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
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24. 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
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25. 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
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26. 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
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27. 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
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28. 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
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29. 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
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30. 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
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31. 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
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32. 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.

33. 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.