mutual funds chapter 14
DESCRIPTION
Mutual Funds Chapter 14. Pool $ from Investors. Investor A = $1,000. Investor D = $1,000. Investor C = $1,000. Investor E = $1,000. Investor B = $1,000. Investor F = $1,000. What is a Mutual Fund?. - PowerPoint PPT PresentationTRANSCRIPT
Mutual FundsChapter 14
Pool $ from Investors
Investor A = $1,000.
Investor B =
$1,000.
Investor C =
$1,000.
Investor D =
$1,000.
Investor E =
$1,000.
Investor F =
$1,000.
What is a Mutual Fund?
• A professionally managed groupgroup of investments bought using a pool of money from many investors
• Individuals buy sharesshares in the mutual fund
What is a Mutual Fund?
• Fund managers use this money to buy stocks, bonds and securities
• InvestmentInvestment ObjectivesObjectives determine the kinds of securities purchased
Family of Funds
• Variety of funds covering a whole range of investment objectives
• Fidelity has over 175 different mutual funds
• Advantage of using a “family fundfamily fund” - can trade in and out of funds within group• provides an opportunity to diversify • i.e. $5,000 to invest: 25% in aggressive
stocks, 25% in growth, 50% in income fund
Professional Fund Managers
Buy & Sell based on:market conditionseconomic conditionstrends+ other factors
Investors share in dividends & capital gains
Buying Mutual Funds
• Initial purchase $500 - $3,000• Can add additional monies at any time
Advantages of Mutual Funds
• Professional Management - managers follows the stocks and bonds
• Vanguard Health Care Fund Investor Shares (VGHCX)
• Let’s take a look at the managers
• ManagementWellington Management Company, LLP
• Firm Description
• Founded in 1928, Wellington Management Company, LLP, Boston, Massachusetts, is among the nation’s oldest and most respected institutional investment managers. The firm has advised Vanguard Health Care Fund since 1984.
• Investment Manager Biography
• Edward P. Owens, CFA, Senior Vice President and Partner• Portfolio manager. • Advised the fund since 1984. • Worked in investment management since 1974. • B.S., University of Virginia. • M.B.A., Harvard Business School.
• Direct research
Advantages of Mutual Funds
• Liquid• Diversification - purchasing a variety of
stocks and bonds• Low investment minimum - pooling
your money with other investors
Types of Mutual Funds
GROWTH FUNDGROWTH FUND - investment goal is to buy stocks that will increase in value over time
-- companies that reinvest profits rather than give dividends
-- earn profits via capital gains-- assume high risk for chance of high returnAggressive growth fund - new or out-of-favor
companiesOther growth funds - slower, steadier rate of
growth-- risky
Types of Mutual Funds
INCOME FUNDINCOME FUND - investment goal is to buy securities that consistently pay good dividends
-- companies that usually pay dividends rather than reinvest in company
-- invests in bonds that pay regular interest
Types of Mutual Funds
-- looking for income rather than capital gains
-- moderate risk
Types of Mutual Funds
GROWTH AND INCOME FUNDGROWTH AND INCOME FUND - investment goal is to earn return from dividends + capital gains
-- moderate risk
Types of Mutual Funds
BALANCED FUNDBALANCED FUND - attempts to minimize risk by investing in a mixture of:
stocks (preferred and common) bonds (corporate and municipal)-- provides both income and growth-- low-risk Goal: current income and long-term
growth with safety
Types of Mutual Funds
BOND FUNDSBOND FUNDS - invests in bonds to try to achieve stable income with minimal risk
Invests in: governmentcorporatetax-exempt bonds
-- most low-to-moderate risk-- risky if investing in junk bonds
Types of Mutual Funds
GLOBAL FUNDSGLOBAL FUNDS - purchases international stocks and bonds as well as US securities
Appreciate when:> stock markets abroad are strong> world conditions favor certain
overseas markets
Types of Mutual Funds – Global cont.
> fluctuations in currency exchange rates
-- can be an income fund, growth fund, aggressive growth fund, etc.
Types of Mutual Funds
INDEX FUNDSINDEX FUNDS - (index is an average of the price movements of certain selected securities)
-- tries to match the performance of a particular index by investing in the companies included in that index
-- S & P 500 / Dow Jones Industrial Average
SPY mutual funds follow S&P 500 index
Types of Mutual Funds - Index
-- risk level depends on index it is tied to - tied to DOW = low risk (blue
chips)
Types of Mutual Funds
MONEY MARKET FUNDSMONEY MARKET FUNDS - invests in safe, liquid securities, such at Treasury Bills and bonds that mature in 3-6 months
-- maximum safety
Minimum Investment Required
Minimum Investment Required
Evaluating Mutual Funds
To choose --> you must know YOUR OWN investment objectives & risk tolerance
Do you want income from your investments now, or can you wait for capital gains in the future?
Evaluating Mutual Funds
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?
Net Asset Value (NAVNAV)
• Prices NOT determined by what people are willing to pay
• Prices ARE determined by NAVNAV• NAVNAV = total value of a fund’s
investment portfolio minus its liabilities, divided by the number of outstanding shares of the fund
Net Asset Value (NAVNAV)
Value of Portfolio - Liabilities NAV = Number of Shares
$100,000 - $90,000 500 = $20
-- calculated at the END of each business day
Prospectus
• Legal document that offers securities or mutual fund shares for sale
Contains: terms summary of funds portfolio investments objectives financial statements - showing past performance
Before Buying
• Read the prospectus carefully• Compare objectives with your own• Compare past performance with that of
other funds
Costs and Fees
LOADLOAD - sales fee paid for mutual fund
FRONT-END LOADFRONT-END LOAD - sales charge paid when you buy an investment
BACK-END LOADBACK-END LOAD - sales charge paid when you sell an investment-- fees can range from 2 to 8% of the value of shares purchased
NO-LOAD FUNDNO-LOAD FUND - no sales fee (no salesperson - direct purchase)
Costs and Fees
• Annual Annual Management/Administrative FeeManagement/Administrative Fee - charge to manage fund• 1 to 1-1/2% of funds total assets
• 12b-1 Fee12b-1 Fee - charge for marketing and distributing fund (part of expense ratio)
Pg. 389
• Review How to Read the Mutual Funds Listings
Direct Real Estate Investments
Real EstateReal Estate - land and any buildings on it
--> often increase higher than inflation over time
--> least liquid--> sometimes speculative ( possible loss)
Direct Real Estate Investments
Commercial PropertyCommercial Property - land and buildings that produce lease or rental income(office buildings, stores, hotels, apartments)
Direct Real Estate Investments
Invest DIRECTLY or INDIRECTLY
Direct - investor holds legal title to the property
EXAMPLES OF DIRECTDIRECT:Raw Land
Vacant land / unimproved property
speculative investment - hold and sell later for profit
must pay cash - banks unwilling to make loans
Detached Houses
• Purchase single-family home and rent• Bank reluctant to make loans (not
owner-occupied)• larger down payment• higher interest rate
Duplex
• A building with two separate living quarters
• same responsibilities to renters as the owner of a single-family home
Condominium
• An individually owned unit in an apartment-style complex with shared ownership of common areas
• Owner of condo owns the individual apartment as well as a proportional share of common areas, such as the lobby, yard, and hallways
• Monthly fee for upkeep of common areas
Recreation & Retirement Property
• Retirement - buy second home for vacation or retirement years
• Rent property when owners are not there
• Recreation - beach, mountain cabins, and vacant land
• Rent the property
EXAMPLES OF INDIRECTINDIRECT:
• Investors appoint a trustee to hold legal title on behalf of all the investors in a group
• Trustee - individual or institution that manages assets for someone else
real estate syndicates / real estate investment trusts / mortgage pools
Real Estate Syndicates
• Group of investors who pool their money to buy high-priced real estate
• Temporary group organized for the purpose of raising large capital amounts
• Organizer called = general partner/syndicator
• Investors = limited partners
Real Estate Syndicates
R e a l E s ta te S yn d ica te
L im ited P artn e r$ 25 ,000
lim ite d lia b ility
L im ited P artn e r$ 15 ,000
lim ite d lia b ility
L im ited P artn e r$ 20 ,000
lim ite d lia b ility
G e n era l P artn e rF o rm s P a rtne rsh ip
A ssu m e s U n lim ited L ia b ility
Real Estate Investment Trusts (REITS)
• Similar to a mutual fund - corporation pools money of many individuals to invest in real estate
• REIT makes all buy/sell decisions• Trade on stock exchanges• include rental properties for monthly
income / mortgages for long-term income
Participation Certificates
• Investment in a pool of mortgages that have been purchased by a government agency
• “Ginnie Mae” “Freddie Mac” “Fannie Mae”
• secure as Treasury securities• $1,000 investment
PRECIOUS METALS
• Natural substances that people value
• Gold• Silver• Platinum
• Inflation causes price up when quantity & quality remain same
Gemstones
• Precious stones
• Diamonds• Rubies• Saphires• Emeralds
usually sold as jewelry
Collectibles
• Valuable or rare items
• Antiques• Comic books• Coins
• Most risky - often hard to find buyer• Thus, illiquid
Commodities
• Futures – contracts to buy/sell commodities or stocks
• Wheat• Corn• Soybeans• Cattle• Metals – gold, silver
Option
• Call Option – right, but not the obligation to buy/sell commodity or stock for a specified price within a specified time period
• Put Option – right, to SELL
Other Investment Choices
• Investing in precious metals, gems, futures contracts and options are all VERY RISKY - not for novice