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

2. 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

3. 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

4. Terms to know • Leverage • Depreciation • Precious metals • Gems • Futures contract • option

5. 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

6. 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

7. 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

8. 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

9. 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.

10. 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

11. 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.

12. 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

13. 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

14. 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)

15. 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

16. 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

17. 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

18. 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)

19. 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)

20. 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)

21. 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

22. 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

23. 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)

24. 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

25. 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