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14. Investing in Mutual Funds, Real Estate, and Other Choices. 14.1 Investing in Mutual Funds 14.2 Investing in Real Estate and Other Choices. Lesson 14.1 Investing in Mutual Funds. GOALS Discuss mutual funds as an investment strategy. Explain how to buy and sell mutual funds. - PowerPoint PPT Presentation
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© 2010 South-Western, Cengage Learning
Chapter
© 2010 South-Western, Cengage Learning
Investing in Mutual Funds, Real Estate, and Other Choices
14.1 Investing in Mutual Funds14.2 Investing in Real Estate andOther Choices
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© 2010 South-Western, Cengage Learning
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Lesson 14.1Investing in Mutual Funds
GOALS■ Discuss mutual
funds as an investment strategy.
■ Explain how to buy and sell mutual funds.
© 2010 South-Western, Cengage Learning
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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.
■ The kinds of securities they buy depend on the fund’s stated investment objectives.
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Advantages of Mutual Funds
■ Professionally managed■ Liquid■ Diversified■ Require only a small minimum investment
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Mutual Fund Risk
■ Growth funds■ Income funds■ Growth and income funds■ Money market funds■ Global funds■ Index funds
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Growth Funds
■ A growth fund is a mutual fund whose investment goal is to buy stocks that will increase in value over time.
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Income Funds
■ An income fund is a mutual fund whose investment goal is to produce current income in the form of interest or dividends.
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Growth and Income Funds
■ A growth and income fund is a mutual fund whose investment goal is to earn returns from both dividends and capital gains.
■ A balanced fund is a mutual fund that seeks both growth and income but attempts to minimize risk by investing in a mixture of stocks and bonds rather than stocks alone.
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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.
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Global Funds
■ A global fund is a mutual fund that purchases international stocks and bonds as well as U.S. securities.
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Index Funds
■ An index is an average of the price movements of certain selected securities.
■ Investors use indexes as benchmarks for comparison to judge how well their investments are doing.
■ An index fund is a mutual fund that tries to match the performance of a particular index by investing in the companies included in that index.
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Risk and Return Pyramid
Money Market Funds
Income Funds
Growth andIncome Funds
GrowthFunds
Higher risk/higherreturn potential
Lower risk/lowerreturn potential
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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?
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Number of SharesValue of Portfolio – Liabilities
=NAV
Net Asset Value
■ 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.
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The Prospectus ■ The prospectus is a legal document that offers securities or mutual fund shares for sale.
■ 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
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Costs and Fees
■ If you buy a mutual fund through a broker, you will likely have to pay a sales fee, called a load.
■ Front-end load■ Back-end load■ No-load fund
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The Mutual Fund Company■ You have no guarantees that a mutual fund will make money or
that the mutual fund company itself will not fail. ■ To reduce these risks, choose a mutual fund company that has
the following characteristics:■ It has been in business for 20 or more years■ It has a solid track record of returning good solid returns to investors■ It is a large company that manages investments for millions of
investors■ It is a well-known company that is highly respected among investment
advisers and experts■ It exists both in brick-and-mortar and in cyberspace■ It is customer friendly and responsive to customer questions and
needs■ It provides customers with easy-to-read statements and reports and
offers daily online access
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Sources of Mutual Fund Information
■ Financial publications■ Online
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Lesson 14.2Investing in Real Estate andOther Choices
GOALS■ Explain real estate investing, both direct and
indirect.■ Describe other investments, including metals,
gems, collectibles, and financial instruments.
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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.
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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
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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.
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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.
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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.
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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.
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Investing Indirectly
■ Real estate syndicates■ Real estate investment trusts (REITs)■ Participation certificates
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Buying and OwningRental 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.
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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.
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Monthly Management■ To manage your property, you can:
■ Be a resident landlord■ Hire a resident landlord■ Hire a property manager
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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)
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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.
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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.
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Risks of Owning Rentals
■ Damage■ Vacancies■ Zoning laws and local use restrictions
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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.
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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.
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Gems and Jewelry
■ Gems are natural, precious stones, such as diamonds, rubies, sapphires, and emeralds.
■ Their prices are high and subject to drastic change.
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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.
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Financial Instruments
■ Futures■ Commodities■ Option
■ Call option■ Put option