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Investing in Mutual Funds, Real Estate, and Other Alternatives. Chapter 14. Objectives:. Describe types of mutual funds, how they work, an how to invest in them Explain types of commercial real estate investment Identify potential investment choices in precious metals, gems, and collectibles.
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Investing in Mutual Funds, Real Estate, and Other Alternatives Chapter 14
Objectives: • Describe types of mutual funds, how they work, an how to invest in them • Explain types of commercial real estate investment • Identify potential investment choices in precious metals, gems, and collectibles. • Discuss the nature of futures and options markets
Family of funds Growth Fund Income fund Balanced fund Bond fund Global fund Prospectus Front-end load Back-end load No-load funds Duplex Condominiums Mortgage Limited partnership Real estate investment trust (REIT) Participation certificate Terms to know
Terms to know • Leverage • Depreciation • Precious metals • Gems • Futures contract • option
Investing in Mutual Funds, Real Estate, and Other Alternatives • Mutual Fund Investments: • Is an investment alternative for individuals who pool their own and other investors’ money to buy stocks, bonds and other securities sold by an investment company • Investment company is a firm that, for a management fee, invests the pooled funds in different types of securities • Investment company offer many different funds; which are known as Family of funds
Investing in Mutual Funds, Real Estate, and Other Alternatives • An invested can move back and forth among funds. (example switch from a stock fund to a bond fund) • For most mutual funds there is a deposit of $500 to $3,000 or more an investor must make • Once the account is open; an investor can make additional purchases when ever he or she wants
Investing in Mutual Funds, Real Estate, and Other Alternatives • Why Investors Purchase Mutual Funds: • There is a Professional watching the stock market or bond market for the investor • The investment is diversified (meaning numerous and diverse stock and bond issues) • Make transfers by telephone • Investment is Liquid • Investor can quickly get his money
Investing in Mutual Funds, Real Estate, and Other Alternatives • Types of Mutual funds: • Growth, Income, balanced, bond, global, and index funds • Growth Fund – invests in the common stock of established companies and industries (aggressive growth fund) • Income Funds – income-producing securities which consistently pay good dividends (moderate risk) buy common and preferred stock
Investing in Mutual Funds, Real Estate, and Other Alternatives • Balanced Funds – invests in a mixture of stocks and bonds (purpose is to reduce risk which maintaining both current income and growth) • Bond Funds – invests in government, corporate, or tax-exempt bonds with different maturity dates (considered high-yield funds) purpose taxes • Global Funds – purchases international stocks and bonds as well as U.S.
Investing in Mutual Funds, Real Estate, and Other Alternatives • Global funds are considered moderate-to high-risk investment • Index Funds – holds stocks or bonds that react the same as the stock or bond markets as a whole do (moderately risky) • Money Market Funds – invest in short-term corporate obligations and government securities (goal is the preservation of principal and high liquid
Assignment: Group • Earnings on mutual funds are called dividends. They are taxable except for the earnings of a tax-free bond fund. *Analyze the pros and cons of investing directly in tax-free bonds versus investing in a tax-free mutual bond fund.
Investing in Mutual Funds, Real Estate, and Other Alternatives • Evaluation of Mutual Funds: • When considering the purchase of a mutual fund; examine the prospectus cost, fees, and fund’s ranking • Prospectus – contains information about how the fund operates, a summary of an investment, its goals, and objectives
Investing in Mutual Funds, Real Estate, and Other Alternatives • Cost and Fees: • Buying mutual funds from a broker, will likely make the fund a load fund • Front-end load – an individual will pay a commission on their initial purchase and sometime on reinvested dividends • Back-end load – an individual will pay a commission when they sell shares before a certain period of time • Value range from 2 to 8 percent a share
Investing in Mutual Funds, Real Estate, and Other Alternatives • No-end load – do not charge commissions when you buy because there is not a salesperson (Buy from mutual fund company) • Other fees to consider are annual management/administrative fees • (average about 1 percent of a fund’s total assets)
Investing in Mutual Funds, Real Estate, and Other Alternatives • Fund Rankings: • Are listed in business magazines, reviewing one year, five, and ten year performance are compared to other companies • Earnings on Investment: • Most mutual funds are taxable, except for tax-free mutual free • On the taxed mutual funds; gains on investment makes the fund taxable
Investing in Mutual Funds, Real Estate, and Other Alternatives • Real Estate Investment: • Deal with direct and indirect real estate ownership • Commercial Property - refers to land and building that produce lease or rental income. • Example of properties are: • Office Building, stores, hotels, and duplexes, and multiunit apartments
Investing in Mutual Funds, Real Estate, and Other Alternatives • Direct Real Estate Investments; • Real estate is a good hedge against inflation, usually increasing in value over the years, often at rates equal to or higher than inflation • It is least liquid investment a person can make (not being able to receive cash when a person want it) • The investor holds legal title to the property
Investing in Mutual Funds, Real Estate, and Other Alternatives • Direct real estate includes: Land, single-family dwellings, duplexes, apartments, and nonresidential real estate • Raw land: • Vacant land, or unimproved property, is considered a tentative investment • People hold the property, hoping for future gain • Purchase of vacant lots or sometimes also used for building a house on a later date • (banks are unwilling to loan money)
Investing in Mutual Funds, Real Estate, and Other Alternatives • Detached Houses: • Deals with purchase a single family house and rent it to others • Responsibility are very important (keep the house up) • Duplexes: • Is a building with two separate living quarters • Responsibility are the same as Detached housing (rental property)
Investing in Mutual Funds, Real Estate, and Other Alternatives • Condominiums (condos): • Are individually owned units in apartment-style complexes • The individual owner also own proportional share of common area, such as the lobby, yard, and hallways • (cheaper then detached houses due to share different responsibility) • Recreation and Retirement Property: • Used for relaxing during later year of individual life: (rent out when not there)
Assignment (individual) • Imagine what it would be like to work for thirty years and then retire to some place they had always wanted to live. Decide on three places: one in your home state, one in the United States but outside your home state, and one anywhere in the world. • 1. Write a paragraph about each place, and explain why you would choose to live there during retirement
Investing in Mutual Funds, Real Estate, and Other Alternatives • Indirect Real Estate Investments: • Mortgage , limited partnerships, real estate investment trusts, and mortgage pools • Mortgage – is the borrowing of money for a house purchase • Limited Partnership – is a comprised of a group of investors who pool their money to buy high-price real estate
Investing in Mutual Funds, Real Estate, and Other Alternatives • Real Estate Investment Trusts (RIET) • Money is pooled with other people’s money; similar to real estate • Participation certificate – is an investment in a pool of mortgages that have been purchased by one of several government agencies (sold by federal agencies)
Investing in Mutual Funds, Real Estate, and Other Alternatives • Property Ownership: • Leverage – borrow money to make the purchases of a home • (pay 20% of the cost and borrow the other 80% from the bank) • Equity is what the owner keeps after selling the property (interest) • Money life over after the expenses are paid is called positive cash flow
Investing in Mutual Funds, Real Estate, and Other Alternatives • Not earning enough to pay the bills is called negative cash flow • Depreciation – deducting the value of property due to wear and tear • Things that cause wear and tear are: • Renters damaging and destroying property • Declines cash flow due the vacancy rates increase