Managing Personal Finances - Investing in Mutual Funds, Real Estate and Other Choices

1. © 2010 South-Western, Cengage Learning
Chapter
© 2016 South-Western, Cengage Learning
19.1 Investing in Mutual Funds
19.2 Investing in Real Estate and
Other Choices
Investing in Mutual
Funds, Real Estate,
and Other Choices
19
© 2016 South-Western, Cengage Learning

2. © 2010 South-Western, Cengage Learning SLIDE 2
Chapter 19
Lesson 19.1
Investing in Mutual Funds
Learning Objectives
LO 1-1 Discuss mutual funds as an
investment strategy.
LO 1-2 Explain how to buy and sell mutual
funds.
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3. © 2010 South-Western, Cengage Learning SLIDE 3
Chapter 19
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 depends upon
the fund’s stated investment objectives.
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4. © 2010 South-Western, Cengage Learning SLIDE 4
Chapter 19
Advantages of Mutual Funds
Professional management
Diversification
Liquidity
Small initial and ongoing purchases
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5. © 2010 South-Western, Cengage Learning SLIDE 5
Chapter 19
Mutual Fund Risk
Growth funds
Income funds
Growth and income funds
Money market funds
Global funds
Index funds
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6. © 2010 South-Western, Cengage Learning SLIDE 6
Chapter 19
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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7. © 2010 South-Western, Cengage Learning SLIDE 7
Chapter 19
Income Funds
An income fund is a mutual fund whose
investment goal is to produce current
income on a steady basis in the form of
interest or dividends.
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8. © 2010 South-Western, Cengage Learning SLIDE 8
Chapter 19
Growth and Income Funds
A growth and income fund is a mutual
fund whose 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.
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9. © 2010 South-Western, Cengage Learning SLIDE 9
Chapter 19
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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10. © 2010 South-Western, Cengage Learning SLIDE 10
Chapter 19
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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11. © 2010 South-Western, Cengage Learning SLIDE 11
Chapter 19
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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12. © 2010 South-Western, Cengage Learning SLIDE 12
Chapter 19
Risk and Return Pyramid
Money Market Funds
Income Funds
Growth and
Income Funds
Growth
Funds
Higher risk/higher
return potential
Lower risk/lower
return potential
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13. © 2010 South-Western, Cengage Learning SLIDE 13
Chapter 19
Buying and Selling Mutual Funds
 To choose the mutual fund that is right for you,
you must know your own investment objectives
and level of 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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14. © 2010 South-Western, Cengage Learning SLIDE 14
Chapter 19
The Mutual Fund Company
 You have no guarantee that a mutual fund will make
money or that the mutual fund company will not fail.
 To reduce the risks, choose a mutual fund company
with the following characteristics:
 Has been in business for 20 or more years.
 Has a good track record of providing solid returns to its investors.
 Is a large company that manages investments for millions of
investors.
 Is a well-known company that is highly respected among investment
advisers and experts.
 Exists both in brick-and-mortar and in cyberspace.
 Is customer-friendly and responsive to customer needs.
 Provides customers with easy-to-read statements and reports and
offers daily online access.
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15. © 2010 South-Western, Cengage Learning SLIDE 15
Chapter 19
Sources of Mutual Fund
Information
Financial publications
Online
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16. © 2010 South-Western, Cengage Learning SLIDE 16
Chapter 19
The Prospectus
 The prospectus is a legal document issued by
an investment company that provides details
about the securities it offers for sale.
 It must contain the following:
 A summary of the fund’s portfolio of investments
 The fund’s objectives
 Fund investment strategies
 Financial statements showing past performance
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17. © 2010 South-Western, Cengage Learning SLIDE 17
Chapter 19
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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18. © 2010 South-Western, Cengage Learning SLIDE 18
Chapter 19
NAV =
Value of Portfolio – Liabilities
Number of Shares
Mutual Fund Prices
(Net Asset Value)
 The net asset value (NAV) 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 of the
fund.
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19. © 2010 South-Western, Cengage Learning SLIDE 19
Chapter 19
Lesson 19.2
Investing in Real Estate and
Other Choices
Learning Objectives
LO 2-1 Explain real estate investing, both
direct and indirect.
LO 2-2 Describe other investments,
including metals, gems, collectibles, and
financial instruments.
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20. © 2010 South-Western, Cengage Learning SLIDE 20
Chapter 19
Real Estate Investing
 When you invest in real estate, you are buying land
and any buildings on it.
 Advantages
 Investing in real estate is considered a good way to combat
inflation.
 Real estate 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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21. © 2010 South-Western, Cengage Learning SLIDE 21
Chapter 19
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
Vacation homes
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22. © 2010 South-Western, Cengage Learning SLIDE 22
Chapter 19
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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23. © 2010 South-Western, Cengage Learning SLIDE 23
Chapter 19
Single-Family Houses
 In addition to owning your own home, you
might wish to purchase a single-family house
and rent it to others.
 Some banks are reluctant to grant 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 as the owner.
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24. © 2010 South-Western, Cengage Learning SLIDE 24
Chapter 19
Rental Properties
 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.
 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, usually with separate entrances.
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25. © 2010 South-Western, Cengage Learning SLIDE 25
Chapter 19
Vacation Homes
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.
Vacation property includes beach and
mountain cabins and even vacant land
near recreational sites such as rivers,
lakes, or an ocean.
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26. © 2010 South-Western, Cengage Learning SLIDE 26
Chapter 19
Buying and Owning Rental 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.
 Borrowing money for an investment is called
leverage.
 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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27. © 2010 South-Western, Cengage Learning SLIDE 27
Chapter 19
Monthly Payments
 As your tenant makes rent payments, you
make the mortgage payments to the bank.
 You can use the difference between the
amount of rent collected and the mortgage
payment to pay property taxes and 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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28. © 2010 South-Western, Cengage Learning SLIDE 28
Chapter 19
Monthly Management
To manage your property, you can:
Be a resident landlord
Hire a resident landlord
Hire a property manager
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29. © 2010 South-Western, Cengage Learning SLIDE 29
Chapter 19
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 not live on site
 Usually manages several properties
(continued)
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30. © 2010 South-Western, Cengage Learning SLIDE 30
Chapter 19
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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31. © 2010 South-Western, Cengage Learning SLIDE 31
Chapter 19
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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32. © 2010 South-Western, Cengage Learning SLIDE 32
Chapter 19
Risks of Owning Rentals
Damage
Vacancies
Zoning laws and local use restrictions
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33. © 2010 South-Western, Cengage Learning SLIDE 33
Chapter 19
Indirect Investing
Real estate investment trusts (REITs)
Real estate syndicates
Certificates of participation (COPs)
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34. © 2010 South-Western, Cengage Learning SLIDE 34
Chapter 19
Other Investing Choices
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.
 They can be difficult to sell in a hurry, and do not
provide any current income in the form of interest or
dividends.
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35. © 2010 South-Western, Cengage Learning SLIDE 35
Chapter 19
Precious Metals
Precious metals are tangible metals that
have a 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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36. © 2010 South-Western, Cengage Learning SLIDE 36
Chapter 19
Gems and Jewelry
Gems are natural, precious stones, such
as diamonds, rubies, sapphires, and
emeralds.
Their prices are high and subject to
drastic change.
Gems have the greatest value as jewelry.
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37. © 2010 South-Western, Cengage Learning SLIDE 37
Chapter 19
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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38. © 2010 South-Western, Cengage Learning SLIDE 38
Chapter 19
Financial Instruments
 Futures—A financial contract obligating the buyer to
purchase an asset (or the seller to sell an asset),at a
predetermined future date and price.
 Commodities—products that are mined or grown
 Option—the right to buy or sell for a specified price
within a specified time period
 Call option—the right to buy shares of stock at a set
price by a certain expiration date
 Put option—the right to sell stock at a fixed price
until the expiration date
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