Investing in Mutual Funds, Real Estate and Other Alternatives

1. Investing in Mutual Funds, Real Estate and Other Alternatives Money Management Chapter 14 Notes

2. Mutual Funds • This is the most popular investment alternative out there! Here are the basics: • Individual investors from around the worldpool their money together to buy stocks, bonds and other securities sold by an investment company. • The investment company that manages the fund makes all the decisions about what to buy and sell. They charge a management fee for their services. • Professional fund managers buy and sell based on the goals of that particular fund and their expertise with the market.

3. Why Investors Purchase Mutual Funds • Convenient for the investor! • You don’t have to worry about following the stock and bond markets, or about looking for hot new investments. Professionals are doing the work for you. • Provides Diversification! • When you invest in funds, you are diversifying because mutual funds purchase numerous and diverse stock and bond issues. • High Liquidity! • You can turn your money into cash whenever you need it (unless, of course, the fund is part of some type of retirement account). • Usually less risky than the stock market! • You can get a great rate of return without as much risk as you would have with investing in individual stocks.

4. Types of Mutual Funds • Individual funds have different investment goals and strategies. You should choose funds that have goals and strategies that match your own. • There are many different types of funds to choose from including: Growth, income, balanced, bond, global and index funds.

5. Growth Funds • A growth fundinvests in thecommon stock of established companies and industries that are still growing. They are considered a bit more risky but can really hit big. • An aggressive growth fundinvests in the common stock ofnew companies. These are even more risky but can lead to massive returns if they hit. • Examples of some of the top growth funds can be seen at: http://www.marketwatch.com/tools/mutualfunds/100index.asp?tf=9&view=2&siteid=mktw • http://www.marketwatch.com/tools/mutualfunds/overview.asp?siteid=mktw&symb=FMILX&sid=9964

6. Income Funds • An income fundspecializes in income-producing securitieswhich consistently pay good dividends. • The goal of these types of funds is current dividend income. Income funds are considered to be moderate risk. • Sometimes you see combination funds like a Growth-income fund. For example, the managers of this type of fund will be looking for companies that are growing AND paying dividends. • For examples of some of the top performing index funds check out: http://www.marketwatch.com/tools/mutualfunds/100index.asp?tf=9&view=37&siteid=mktw

7. Balanced Funds • A balanced fundinvests in a mixture of stocks and bonds. The purpose is to reduce risk while maintaining both current income and growth. • Balanced funds are generally considered low-risk investments. • The goal of the fund is to provide current income AND long-term growth with safety. • For an example of a balanced fund check out: • http://www.marketwatch.com/tools/mutualfunds/overview.asp?siteid=mktw&symb=VWELX&sid=5376

8. Index Funds • An index fundholds stocks or bonds that react the same as the stock or bond markets as a whole do. • Many of these funds are tied to a specific market average such as the Standard and Poor’s Index of 500 large company stocks. • The goal of these funds is to mirror the movements of certain markets, going up as they go up. • These funds are considered moderately risky. For an example of this type of fund check out: http://www.marketwatch.com/tools/mutualfunds/100index.asp?tf=9&view=36&siteid=mktw

9. Money Market Funds • Money market funds invest in short-term corporate obligations and government securities. • These short-term maturities provided current income and maximum safety. • The goal for any money market fund is high liquidity and preservation of your principal. • For some of the top money market funds check out:http://www.ibcdata.com/index.html

10. Reading a Mutual Fund Quote • Some of the basics: • NAV – stands for Net Asset Value. It refers to the dollar value of one share of the fund. • YTD Return – stand for Year to Date Return. This tells you how much the fund has made or lost that year (listed as a percentage). • Fund Obj. – This tells you the objective of the fund. (Is it a growth, balanced, or income fund etc…)

11. Real Estate Investment • Real estate is considered one of the safest investments out there! Why? • Historically, property is the best defense against inflation. Simply put, over time property values have risen at a greater rate than inflation. • In a direct real estate investment, you buy a home or a piece of land and you own legal title to the property. • In an indirect real estate investment, investors appoint a trustee to hold legal title to the property on behalf of all the investors in the group.

12. Property Ownership • When buying real estate, most people make a down payment and get a loan secured by a mortgage to pay the balance. • You borrow money to make the purchase and you pay the money back, month by month over time. • Your mortgage stays fixed but the value of the house goes up over time! • For example, if you buy a $200,000 house and make a down payment of $40,000 (20% down payments are usually required), you have to borrow $160,000 from the bank. • After a five years let’s say the house is now worth $250,000 and you decide to sell it. You could pay off the $160,000 you owed on your mortgage and have $90,000 left. • That extra money is called equity! Equity is the difference between the sales price and the amount owed on the mortgage.

13. Pros and Cons • Real-estate investment givesexcellent returns if the property is well-maintained. • Real-estate investment provides great tax benefits. • However, real-estate is one of the least liquid investments you can make. Depending on the market, it can take months or even years to sell!