PERSONAL FINANCE MBF3C Lesson #7: Investment Alternatives
Mr. and Mrs. Johnson are concerned with their children’s future. Theyinitiate this discussion: “OK, you’re going to school, you’re working, and you’ve got some money now. One day—I know, it’s a long time from now—you may want to buy a house, go on a cruise, or retire with a million dollars, no, two million dollars. How can you create financial independence for yourself and your kids? Yes, I said your kids!” How can learning about investments now help you in the future?
Mutual Funds • A mutual fund is one type of investment opportunity. • An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. • type of investment where people pool their money together to buy stocks, bonds, and other assets • managed by an investment company that charges a fee
Mutual Funds • A mutual fund is one type of investment opportunity. Go to: www.mcgrawhill.ca/links/foundations11
GROWTH RATE: the percent by which an investment increases (or decreases) in value over a given time 1. a) Which fund has the greatest growth rate ? What is the growth rate? b) Which fund has the least growth rate? What is the growth rate? c) Explain why investing in a mutual fund might be considered risky.
Mutual Funds (cntd.) 2. How do the five-year or 10-year rates of return compare for the same funds? 3. Use the compound interest formula or a TVM Solver to calculate the approximate value of $1000 invested 10 years ago in these funds.
Example 1 A One-Time Investment • A mutual fund has an average annual rate of return of 12.45%. The investment company charges 2% per year as a fee for managing the account. Suppose $1000 is invested for three years. Calculate the approximate value of the investment, assuming annual compounding. The future value of the investment will be an approximation since all conditions of the investment may not be known.
Example 1 A One-Time Investment • A mutual fund has an average annual rate of return of 12.45%. The investment company charges 2% per year as a fee for managing the account. Suppose $1000 is invested for three years. Calculate the approximate value of the investment, assuming annual compounding. The future value of the investment will be an approximation since all conditions of the investment may not be known.
Example 1 A One-Time Investment
Example 2 An Investment That Decreases in Value • Investing often carries an element of risk. Some investments increase in value while some decrease in value. A mutual fund has an average annual rate of return of -5.29%. If the investment company’s fees for managing the account are 2% per year, calculate the approximate value of a $1000 investment after two years, assuming annual compounding. The value of the investment will be an approximation since all conditions of the investment may not be known.
Example 2 An Investment That Decreases in Value • Investing often carries an element of risk. Some investments increase in value while some decrease in value. A mutual fund has an average annual rate of return of -5.29%. If the investment company’s fees for managing the account are 2% per year, calculate the approximate value of a $1000 investment after two years, assuming annual compounding. The value of the investment will be an approximation since all conditions of the investment may not be known.
Example 2 An Investment That Decreases in Value
Registered Retirement Savings Plan (RRSP) • an investment that is set up to provide income after retirement. Generally, you are allowed to put money into an RRSP and claim a deduction on your income tax in that year. Contributions accumulate interest tax-free. When the money is taken out of the RRSP, it is taxed as income.
…How it works http://www.rbcroyalbank.com/products/rrsp/contribution-limits.html
Example 3 Regular Investments • Many people set up an investment, such as a Registered Retirement Savings Plan (RRSP), as a series of small, regular investments. Suppose you invest $200 per month from age 16 until your retirement at age 65. Assume the investment averages a 7% annual rate of return, compounded monthly. How much money will you have upon retirement?
Example 3 Regular Investments
Guaranteed Investment Certificate (GIC) • a type of investment sold to individuals by banks or trust companies usually, GICs pay interest at a fixed rate and cannot be cashed before a specified date
Key Concepts • All investments carry some level of risk. Generally, the greater the risk, the greater the potential return (or loss). Some investments increase in value while others lose value. • One way to accumulate wealth is to invest regularly over a long period of time. This takes advantage of the power of compound interest.
IN-CLASS & HOMEWORK Page 472-474, #3-6
