Investing in Mutual Funds and Real Estate

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Investing in Mutual Funds and Real Estate

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Mutual Fund: Some Basics

• Financial services organization that receives money from shareholders and invests it on their behalf • Investors become part owners in a securities portfolio

More people invest in mutual funds than any other financial product

The Mutual Fund Concept

Pooled diversification• Investors buy into a diversified

portfolio of securities for the collective benefit of individual investors

Basic Mutual Fund Structure

Why Invest in Mutual Funds

• Diversification• Professional

Management• Financial Returns • Convenience

But remember - No choice in securities selectionNo control over sale of securities within fund

How Mutual Funds are Organized and Run

Each fund is a separate corporation or trust owned by shareholders

• Management company - runs daily operations• Investment advisor - oversees portfolio• Distributor - sells fund shares • Custodian - safeguards fund’s assets• Transfer agent - executes transactions and maintains

shareholder records

Open-End Investment Companies• “Mutual fund” commonly denotes this type

of investment company• Shares purchased from and sold back to

company – not traded among individual investors

• New shares issued as money flows in• NAV is usually the quoted price

Types of Investment Companies

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

Net value of all securities held in fund’s portfolio

Net Asset Value (NAV)

NAV =

current price of fund assets - liabilities

number of outstanding shares

• 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

Exchange-Traded Funds (EFT)

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

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

Types of Funds

• Growth• Aggressive Growth• Value• Equity-Income• Balanced• Growth & Income• Bond

• Money Market• Index • Sector• Socially

Responsible• International• Asset Allocation

Bond Funds

• Government bond funds• Mortgage-backed bond funds• High-grade corporate bond funds• High-yield corporate bond funds• Convertible bond funds• Municipal bond funds• Intermediate-term bond funds

Money Market Mutual Funds

• General-purpose money funds• Tax-exempt money funds• Government securities money funds

All highly liquid, low riskAll highly liquid, low risk

Index Funds

• Rather than beat the market index funds try to match the market

• Buy and hold

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

Socially Responsible Funds

• Invests only in firms meeting certain moral, ethical, or environmental factors

• Exclude tobacco, alcohol, gambling, weapon contractors, nuclear power plants

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

• Automatic Investment Plan - mutual fund periodically drafts money from investor's bank account

• Automatic Reinvestment Plan - fund earnings and distributions automatically reinvested in additional shares of fund

• Regular Income - fund automatically pays out predetermined amount to investor

Services Offered by Mutual Funds

Reinvesting Income

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

Making Mutual Fund Investments

The Selection Process• Decide which funds to buy

by assessing your needs• Consider your investment

objectives• What is your intended

use of the fund• What services are

important to you

Measuring Fund Performance

Returns consist of • Dividend income • Capital gains distributions • Change in fund's share price

Past performance does not guarantee future returns

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

Income and Capital Changes

Investing in Real Estate

• Provides greater diversification than does holding just stocks or bonds

• Less volatility than stocks • Doesn’t move in tandem with stocks

Some Basic Considerations

• Cash flow and taxes– Depreciation write-offs reduce taxes– Passive investment

• Appreciation in value• Use of leverage

– Borrowed money magnifies returns

Investing in Income Property

Commercial property • Office buildings,

industrial space, warehouses, retail space, hotels

Residential property• Homes, apartments,

small multifamily buildings

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