Investing in Mutual Funds, Real Estate and Other Alternatives

Money ManagementChapter 14 Notes

Mutual Funds This is the most popular investment alternative out

there! Here are the basics: Individual investors from around the world pool their

money together to buy stocks, bonds and other securities sold by an investment company.

The investment company that manages the fund makes all the decisions about what to buy and sell. They charge a management fee for their services.

Professional fund managers buy and sell based on the goals of that particular fund and their expertise with the market.

Why Investors Purchase Mutual Funds Convenient for the investor!

You don’t have to worry about following the stock and bond markets, or about looking for hot new investments. Professionals are doing the work for you.

Provides Diversification! When you invest in funds, you are diversifying

because mutual funds purchase numerous and diverse stock and bond issues.

High Liquidity! You can turn your money into cash whenever you

need it (unless, of course, the fund is part of some type of retirement account).

Usually less risky than the stock market! You can get a great rate of return without as much

risk as you would have with investing in individual stocks.

Types of Mutual Funds Individual funds have

different investment goals and strategies. You should choose funds that have goals and strategies that match your own.

There are many different types of funds to choose from including: Growth, income, balanced, bond, global and index funds.

Growth Funds A growth fund invests in the

common stock of established companies and industries that are still growing. They are considered a bit more risky but can really hit big.

An aggressive growth fund invests in the common stock of new companies. These are even more risky but can lead to massive returns if they hit.

Examples of some of the top growth funds can be seen at: http://www.marketwatch.com/tools/mutualfunds/100index.asp?tf=9&view=2&siteid=mktw

http://www.marketwatch.com/tools/mutualfunds/overview.asp?siteid=mktw&symb=FMILX&sid=9964

Income Funds An income fund specializes in income-

producing securities which consistently pay good dividends.

The goal of these types of funds is current dividend income. Income funds are considered to be moderate risk.

Sometimes you see combination funds like a Growth-income fund. For example, the managers of this type of fund will be looking for companies that are growing AND paying dividends.

For examples of some of the top performing index funds check out: http://www.marketwatch.com/tools/mutualfunds/100index.asp?tf=9&view=37&siteid=mktw

Balanced Funds A balanced fund invests in a

mixture of stocks and bonds. The purpose is to reduce risk while maintaining both current income and growth.

Balanced funds are generally considered low-risk investments.

The goal of the fund is to provide current income AND long-term growth with safety.

For an example of a balanced fund check out: http://www.marketwatch.com/tools/

mutualfunds/overview.asp?siteid=mktw&symb=VWELX&sid=5376

Index Funds An index fund holds stocks or bonds

that react the same as the stock or bond markets as a whole do.

Many of these funds are tied to a specific market average such as the Standard and Poor’s Index of 500 large company stocks.

The goal of these funds is to mirror the movements of certain markets, going up as they go up.

These funds are considered moderately risky. For an example of this type of fund check out: http://www.marketwatch.com/tools/mutualfunds/100index.asp?tf=9&view=36&siteid=mktw

Money Market Funds Money market funds invest in short-

term corporate obligations and government securities.

These short-term maturities provided current income and maximum safety.

The goal for any money market fund is high liquidity and preservation of your principal.

For some of the top money market funds check out: http://www.ibcdata.com/index.html

Reading a Mutual Fund Quote Some of the basics:

NAV – stands for Net Asset Value. It refers to the dollar value of one share of the fund.

YTD Return – stand for Year to Date Return. This tells you how much the fund has made or lost that year (listed as a percentage).

Fund Obj. – This tells you the objective of the fund. (Is it a growth, balanced, or income fund etc…)

Real Estate Investment Real estate is considered one of the

safest investments out there! Why? Historically, property is the best

defense against inflation. Simply put, over time property values have risen at a greater rate than inflation.

In a direct real estate investment, you buy a home or a piece of land and you own legal title to the property.

In an indirect real estate investment, investors appoint a trustee to hold legal title to the property on behalf of all the investors in the group.

Property Ownership When buying real estate, most people make a

down payment and get a loan secured by a mortgage to pay the balance. You borrow money to make the purchase and you

pay the money back, month by month over time. Your mortgage stays fixed but the value of the

house goes up over time! For example, if you buy a $200,000 house and

make a down payment of $40,000 (20% down payments are usually required), you have to borrow $160,000 from the bank.

After a five years let’s say the house is now worth $250,000 and you decide to sell it. You could pay off the $160,000 you owed on your mortgage and have $90,000 left.

That extra money is called equity! Equity is the difference between the sales price and the amount owed on the mortgage.

Pros and Cons Real-estate investment gives

excellent returns if the property is well-maintained.

Real-estate investment provides great tax benefits.

However, real-estate is one of the least liquid investments you can make. Depending on the market, it can take months or even years to sell!