chapter #14 “investing in mutual funds, real estate, and other choices
TRANSCRIPT
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CHAPTER #14 “INVESTING IN MUTUAL FUNDS, REAL ESTATE, AND OTHER CHOICES
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Day #1 Learning Targets – Mutual Funds
1. Explain what mutual funds are and their advantages.
2. Identify different mutual fund categories and their corresponding risk/return.
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What are Mutual Funds?
Mutual Fund -
Professionally managed group of investments bought using a pool of money from many investors
Funds have different stated objectives
Stocks Bonds
Money Markets
VIDEO
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What are Mutual Funds?
Family of Funds -A variety of funds covering a whole
range of investment objectives
American Funds
How you earn money?
1. Capital Gain2. Dividend Payments
Initial Investment varies:
$500 to $3,000 or more
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Advantages of Mutual Funds
1. Convenience of Professional Management
2. Investment is Liquid3. Diversification4. Need not a lot of money to invest
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Mutual Fund Risk/Return CategoriesGrowth Fund -
Mutual fund whose investment goal is to buy stocks that will increase in value over time
Aggressive Growth Fund -
Invests in stock of new or out-of-favor companies and industries that the fund managers think will achieve above-average increases in value.
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Mutual Fund Risk/Return CategoriesIncome Fund -
Mutual fund whose investment goal is to invest in bonds that produce current income in the form of interest
• Looking for income now rather than capital gains later
• Some specialize in tax-exempt bonds ---- with the goal of tax free income for investors
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Mutual Fund Risk/Return CategoriesGrowth and Income Fund -
Mutual fund whose investment goal is to earn returns from both dividends and capital gains.
Balanced Fund -
Mutual fund whose investment goal is to earn returns from both dividends and capital gains.
Invest in a mixture of stocks and bonds rather than just stocks alone
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Mutual Fund Risk/Return CategoriesMoney Market Funds -
Invests in safe, liquid securities, such as Treasury Bills and bonds that mature in three weeks to six months
• Provides modest current income with little risk.
• Preservation of principal and high liquidity.
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Mutual Funds of Various Risk Categories
Global Funds -A mutual fund that purchases international
stocks and bonds as well as U.S. securities
• Varies in risk depending on the goal of the fund• Other factors like currency exchange and political
instability make these a slight bit riskier• Often stocks of companies in “Emerging
Markets”
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Mutual Funds of Various Risk Categories
Index Funds -A mutual fund that tries to match the
performance of a particular index by investing in companies included in that index
• Matches the risk of that particular index• Examples: Dow Jones or Nasdaq
CompositeETF – Exchange Traded Fund
• Like a mutual fund that can be bought and sold in the market place
End Day 1
Yahoo.com
VIDEO
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Day #2 Learning Targets
3. Students will explain how mutual funds are valued and the different costs and fees that need to be considered.
4. Students will compute return on investment on a mutual fund.
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Evaluating Mutual Funds
Net Asset Value (NAV)-Total value of a fund’s investment portfolio
minus its liabilities, divided by the number of outstanding shares of the fund
• Unlike stocks, it is not determined by what people are willing to pay for them….it is determined by the value of the assets in the fund.
• NAV = Value of the Portfolio – Liabilities / by the Number of Shares
• Calculated at the end of each business day• Always examine costs and fees compared to other
funds with similar objectives
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Evaluating Mutual Funds
The Prospectus - Legal document that offers securities
of mutual fund shares for sale.• Contains terms, a summary of the fund’s
portfolio of investments, objectives, and financial statements showing past performance
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Evaluating Mutual Funds
Load - Sales fee
COSTS AND FEES
Front-end Load - Sales charge paid when you buy and investment
Back-end Load - Sales charge paid when you sell the investment
• 2 – 8 % of the value of the shares purchased
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Evaluating Mutual Funds
COSTS AND FEES
No-Load Fund - Does not charge a sales fee when you buy or sell because no salespeople are involved
Companies make money by charging fees for the professional management they provide.
Annual management fee - 1.5 % of the fund’s total assets
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Evaluating Mutual Funds
COSTS AND FEES
12b-1 fee - Defrays the cost of marketing and distributing the fund
Expense ratio - Percentage of assets deducted each year for fund expenses
• Published with their fund descriptions• Compare expense ratios when
evaluating mutual funds
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Evaluating Mutual Funds
PRINT AND ONLINE SOURCES OF MUTUAL FUND INFORMATION
• Publications – Forbes, Fortune, and Money magazines
• www.morningstar.com - issues reports that compare mutual funds
• Yahoo Finance• Vanguard, Fidelity, and Dreyfus
End Day 2
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Day #3 Learning Target – Real Estate
#5 - Students will explain how real estate is an investment and the various ways to invest in real estate.
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Investing in Real Estate
3 Main Types:
1. Direct Real Estate Investment2. InDirect Real Estate Investment3. Owning and Managing Rental Properties
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Direct Real Estate Investment
Real Estate -Land and any buildings on it.
• Good way to combat inflation• Not very liquid• Can be speculative
Commercial Property -
Land and buildings that produce lease or rental income.
VIDEO
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Direct Real Estate Investment
Vacant Land
• Investors hold property expecting it to go up substantially in value
Single-Family Houses
• Purchased and used as rental property• Not owner occupied, banks usually
require a larger down payment, or a higher interest rate
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Direct Real Estate Investment
Duplexes, Apartments, and Condominiums
An individually owned unit in an apartment-style complex with shared ownership of common areas.
Duplex - Building with two separate living quarters
Condominium -
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Direct Real Estate Investment
Recreation and Retirement Property
• Lake property, mountain cabins, beach houses, and etc.
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InDirect Real Estate Investment
Trustee - Individual or institution that manages assets for someone else
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InDirect Real Estate Investment
Real Estate Investment Trust (REIT) -
Similar to a mutual fund, corporation that pools the money of many individuals to invest in real estate.
• Traded over markets• Dividends paid – 90% of profit must be
given back to investors• Types of investments include:
• Rental Properties• Mortgages• Commercial Property VIDEO
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Owning and Managing Rental Properties
Mortgage - Loan to purchase real estate
Leverage - Borrowing money to buy and investment
• Mortgage is a type of leverage
Equity - Difference between the sales price and mortgage amount
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Owning and Managing Rental Properties
Depreciation - Decline in value of property due to normal wear an tear
• Deductible from taxes, helps to offset rental income
- When property is sold you pay taxes on the capital gain
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Owning and Managing Rental Properties
What are some dangers of rental property?• Damage from renters• Vacancies
Mortgage Calculator
End Day 3
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Day #4 Learning Target – Speculation
#6 - Identify different speculative investments and understand the risk associated with them.
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Investing in Metals, Gems, and Collectibles
Precious metals - Gold, silver, and platinum• Large swings in value, risky
Gems - Precious stones, diamonds, rubies, sapphires, and emeralds
Collectibles - Comic books, baseball cards, stamps
• Jewelry, mark-up of 50 to 500%
• Hard to sell• Tough to locate a buyer who is willing to buy
the collection
VIDEO
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Investing in Metals, Gems, and Collectibles
Speculative Investments
• Easy to purchase, tough to sell• No current income
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Investing in Financial Instruments
Futures - Contracts to buy and sell commodities or stocks for a specified price on a specified date in the future.
• Risky because of unpredictable circumstances
• Farmers enter for protection against volatile prices
VIDEO
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Investing in Financial Instruments
Options - The right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time period
Call Option - The right to buy 100 shares of stock at a set price by a certain expiration date.
Put Option - The right to sell 100 shares of stock at a set price by a certain expiration date.
End Day 4
Yahoo Finance
VIDEO
VIDEO