GITMAN/ JOEHNK/ BILLINGSLEY PFIN 4 13 Investing in Mutual Funds, ETFs and Real Estate Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LEARNING OUTCOMES 1 Describe basic features and operating characteristics of a mutual funds and exchange traded funds 2 Differentiate between open- and closed-end mutual funds as well as exchange traded funds, and discuss the various types of fund loads and charges 3 Discuss types of funds available to investors and the different kinds of investors services offered by mutual funds and exchange traded funds Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 2
LEARNING OUTCOMES (continued) 4 Gain an understanding of the variables that should be considered when selecting funds for investment purposes 5 Identify the sources of return and calculate rate of return earned on an investment in a mutual fund as well as evaluate the performance of an exchange traded fund 6 Understand the role that real estate plays in a diversified investment portfolio along with basics of investing in real estate, either directly or indirectly Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 3
Mutual Funds and Traded Funds • Mutual fund • Financial services organization that receives money from its shareholders • Invests funds in a diversified portfolio of securities • Exchange traded fund (ETF) • Investment company whose shares trade on stock exchanges • Shares can be bought and sold throughout the day Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 4
Exhibit 13. 1 Basic Mutual Fund Structure Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 5
Reasons for Investing in Mutual Funds or ETFs • Achieve diversification in the investment holdings • Obtain services of professional money managers • Pooled diversification: Investors buy into a diversified portfolio of securities for the collective benefit of individual investors • Generate of return on the investment capital • Offer convenience Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 6
How Mutual Funds are Organized and Run • Management company - Runs daily operations • Investment advisor - Oversees portfolio • Distributor - Sells the fund shares • Custodian - Safeguards the securities and other fund assets • Transfer agent - Executes transactions and maintains other records Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 7
Open-End versus Closed-End Funds • Open-end investment company • Issues unlimited number of shares that it buys and sells at a price based on the current market value of the securities • Net asset value (NAV): Current market value of all the securities the fund owns, less liabilities, on a per-share basis • Closed-end investment company • Issues a fixed number of shares which are themselves listed and traded share of stock Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 8
ETFs • Structured as index funds • Offer professional money management of mutual funds • Provide liquidity of an exchange traded stock • Distributors can create new shares or redeem old shares • Contain higher costs, portfolio turnover and taxes when managed actively Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 9
Important Cost Considerations • Load fund: Charges a fee at purchase • Low: Consists a low purchase fee • Back-end: Commission charged for redeeming fund shares • No-load fund: Involves no transaction fees charged Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 10
Important Cost Considerations • 12(b)-1 Fee: Annual fee used to offset the promotion and selling expenses • Management fee: Paid to the professional money managers who administer a mutual fund’s portfolio Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 11
Types of Funds • Growth • Aims for capital appreciation • Involves risk exposure • Viewed as long-term investment vehicles • Aggressive growth • Highly speculative investment vehicles • Seek large profits from capital gains • Volatile in nature Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 12
Types of Funds • Value • Invest in stocks that are considered to be undervalued by the market • Equity-Income • Emphasize current income • Aim to preserve the capital • Viewed as low-risk way of investing in stocks Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 13
Types of Funds • Balanced • Hold a balanced portfolio of stocks and bonds • Generate well-balanced return of current income and long-term capital gains • Confine investing to high-grade securities • Growth-and-Income • Confine investing to high-quality issues • Involve risk due to their emphasis on stocks and capital gains Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 14
Types of Funds • Bond • Invest in various kinds of fixed-income securities • Advantages • More liquid • Offer a cost-effective way of achieving a high degree of diversification • Automatically reinvest interest and other income Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 15
Types of Funds • Index • Buys and holds a portfolio of stocks equivalent to those in a market index • Sector • Restricts investments to particular sector of the market Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 16
Types of Funds • Money market • General purpose: Invests in virtually any type of short-term investment vehicle • Tax-exempt: Limits investments to shortterm, tax-exempt municipal securities • Government securities: Limits investments to short-term securities of the U. S. government and its agencies Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 17
Types of Funds • Socially responsible: Invest only in companies meeting social, ethical, and/or environmental criteria • International fund: Invest in foreign securities • Asset allocation • Spread investors’ money across all different types of markets Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 18
Services Offered by Mutual Funds Automatic investment plan • Enables investor to channel a set amount of money systematically into a given mutual fund Automatic reinvestment plan • Gives shareholders the option of electing to have dividends and capital gains distributions reinvested in additional fund shares Regular income • Systematic withdrawal plan: Allows shareholders to be paid specified amounts of money each period Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 19
Services Offered by Mutual Funds Conversion privileges • Allows investors to switch from one mutual fund to another within in a family of funds Retirement plans • Permitted by government legislations for diverting a part of income of a selfemployed individual Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 20
Selection Process for Making Mutual Fund and ETF Investments • Identify objectives and motives for using funds • Recognize what funds have to offer • Eliminate the alternatives • Evaluate funds investment performance • Stick with no-load or low-load mutual funds Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 21
Measuring Fund Performance • Sources of return • Dividend income • Capital gains distributions • Change in fund's share price • Evaluating ETF performance • Reason for investing in an index based ETF is to replicate the performance of the index • Determined by R-Squared statistical measure Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 22
Basic Considerations of Investing in Real Estate • Factors affecting the value of real estate investments • Cash flow and taxes • Appreciation in value • Use of leverage Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 23
Speculating in Raw Land • Investors seek to generate high rates of return by investing in a property hoping it will increase in value • Involves high risk Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 24
Investing in Income Property • Income-producing property • Purchased for renting to generate periodic income in the form of rent receipts • Commercial properties • Office buildings, industrial space, and warehouses to retail space and hotels • Risk and returns are tied to business conditions and location Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 25
Investing in Income Property • Residential properties • Homes, apartments, and smaller multifamily buildings • Profitability is influenced by the occupancy rates • Other factors to be considered • Location • Local regulations • Supply and demand trends Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 26
Other Ways to Invest in Real Estate • Real estate investment trust (REIT) • Accumulates money, by selling shares to investors to invest in various forms of real estate • Types • Equity • Mortgage • Hybrid Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 27
Other Ways to Invest in Real Estate • Limited partnerships (LPs) • Managers assume the role of general partner with unlimited liability • Other investors are limited partners legally liable only for the amount of their initial investment • Limited liability companies (LLCs) • Includes a managing member and other members without any liability Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 28
KEY TERMS • Mutual fund • Exchange traded fund (ETF) • Pooled diversification • Open-end investment company • Net asset value (NAV) • Closed-end investment company • Load fund • Low-load fund • Back-end load fund • • No-load fund 12(b)-1 fee Management fee General-purpose money fund Tax-exempt money fund Government securities money fund Socially responsible fund (SRF) International fund Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 29
KEY TERMS • • • Automatic investment plan Automatic reinvestment plan Systematic withdrawal plan Conversion (or exchange) privilege Income-producing property Real estate investment trust (REIT) Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 30
SUMMARY • Mutual funds are invested in a diversified portfolio of securities • ETF shares are traded on stock exchanges • Open-end investment companies issue unlimited number of shares at a price based on the current market value of the securities • Closed-end investment companies issue a fixed number of shares which are listed and traded Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 31
SUMMARY • Types of funds • Growth, aggressive growth, value, equityincome, balanced, growth-and-income, bond, money market mutual funds, index, sector, socially responsible, international, and asset allocation • Variables to be considered while making mutual funds and ETF investments • Identify objectives and motives for using funds, recognize what the funds have to offer, eliminate the alternatives, and stick with noload or low-load mutual funds Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 32
SUMMARY • Sources of return • Dividend income, capital gains distributions, and change in fund's share price • Factors that affect the value of real estate investments • Cash flow and taxes • Appreciation in value • Use of leverage Copyright © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN 4 | CH 13 33
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