Chapter
14
Investing in Mutual
Funds, Real Estate,
and Other Choices
14.1 Investing in Mutual Funds
14.2 Investing in Real Estate and
Other Choices
© 2010 South-Western, Cengage Learning
Lesson 14.1
Investing in Mutual Funds
GOALS
Discuss mutual funds as an investment
strategy.
Explain how to buy and sell mutual funds.
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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 depend on the
fund’s stated investment objectives.
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Advantages of Mutual Funds
Professionally managed
Liquid
Diversified
Require only a small minimum
investment
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Mutual Fund Risk
Growth funds
Income funds
Growth and income funds
Money market funds
Global funds
Index funds
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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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Income Funds
An income fund is a mutual fund whose
investment goal is to produce current
income in the form of interest or
dividends.
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Growth and Income Funds
A growth and income fund is a mutual
fund whose investment 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 rather than stocks alone.
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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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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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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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Risk and Return Pyramid
Higher risk/higher
return potential
Growth
Funds
Growth and
Income Funds
Income Funds
Lower risk/lower
return potential
Money Market Funds
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Buying And Selling Mutual Funds
 To choose the mutual fund that is right for you,
you must know your own investment objectives
and 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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Net Asset Value
 The net asset value 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.
NAV =
Value of Portfolio – Liabilities
Number of Shares
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The Prospectus
 The prospectus is a legal document that
offers securities or mutual fund shares for sale.
 It must contain the following:
 The terms
 A summary of the fund’s portfolio of investments
 The fund’s objectives
 Financial statements showing past performance
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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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The Mutual Fund Company
 You have no guarantees that a mutual fund will make money or
that the mutual fund company itself will not fail.
 To reduce these risks, choose a mutual fund company that has the
following characteristics:
 It has been in business for 20 or more years
 It has a solid track record of returning good solid returns to investors
 It is a large company that manages investments for millions of
investors
 It is a well-known company that is highly respected among investment
advisers and experts
 It exists both in brick-and-mortar and in cyberspace
 It is customer friendly and responsive to customer questions and
needs
 It provides customers with easy-to-read statements and reports and
offers daily online access
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Sources of Mutual Fund
Information
Financial publications
Online
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Lesson 14.2
Investing in Real Estate and
Other Choices
GOALS
Explain real estate investing, both direct
and indirect.
Describe other investments, including
metals, gems, collectibles, and financial
instruments.
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Real Estate Investing
 When you invest in real estate, you are buying land
and any buildings on it.
 Advantage
 Investing in real estate is considered a good way to combat
inflation, because it 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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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
Recreation and retirement property
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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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Single-Family Houses
 In addition to owning your own home, you
might wish to purchase a single-family house
and rent it to others.
 You may find banks reluctant to grant you 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.
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Rental Properties
 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.
 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.
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Recreation and Retirement
Property
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.
Recreation property includes beach and
mountain cabins and even vacant land
near vacation sites such as rivers, lakes,
or an ocean.
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Investing Indirectly
Real estate syndicates
Real estate investment trusts (REITs)
Participation certificates
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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.
 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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Monthly Payments
 As your tenant makes rent payments, you
make the mortgage payments to the bank.
 You would use the difference between the
amount of rent collected and the mortgage
payment to pay property taxes and the cost of
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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Monthly Management
To manage your property, you can:
Be a resident landlord
Hire a resident landlord
Hire a property manager
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(continued)
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 do not live on site
 Might manage more than one property
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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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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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Risks of Owning Rentals
Damage
Vacancies
Zoning laws and local use restrictions
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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.
 However, they can be very difficult to sell in a
hurry and do not provide any current income.
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Precious Metals
Precious metals are tangible metals that
have 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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Gems and Jewelry
Gems are natural, precious stones, such
as diamonds, rubies, sapphires, and
emeralds.
Their prices are high and subject to
drastic change.
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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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Financial Instruments
Futures
Commodities
Option
Call option
Put option
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