© 2008 Thomson South-Western CHAPTER 13 INVESTING IN MUTUAL FUNDS

13-2 The Mutual Fund Concept  Pooled diversification –Process whereby investors buy into a diversified portfolio of securities for the collective benefit of individual investors

13-3 The Mutual Fund Concept

13-4 Advantages of Mutual Funds  Diversification—risk is lowered; one share buys a slice of everything in the fund.  Professional management—pay someone else to make investing decisions.  Financial returns—relatively attractive returns over the long term.  Convenience—easy in and out, small outlays, help with record keeping.

13-5 Dis-Advantages of Mutual Funds  No choice in securities selection  No control over sale of securities within fund  Management and other fees

13-6 Comparative Performance of Mutual Funds for the 12-year period through 2005

13-7 How Mutual Funds are Organized and Run  Each fund is a separate corporation or trust and is owned by the shareholders.  Other main players include: –Management company—runs the daily operations. –Investment advisor—oversees portfolio. –Distributor—sells fund shares. –Custodian—physically safeguards fund’s assets. –Transfer agent—executes transactions and maintains shareholder records.

13-8 –Current value of all securities held in fund’s portfolio. –Open-end funds buy back their own shares at NAV. Net Asset Value (NAV) NAV = Current market price of all fund assets (Less any liabilities) Divided by the number of outstanding shares

13-9 Mutual Fund Cost Considerations  Load Funds –Load = sales commission –Front-end load funds (or simply "load funds") charge a commission when shares are purchased. –Low-load funds hold commissions to 2–3% when shares are purchased. –Back-end load funds charge a commission when shares are sold.

13-10  12(b)-1 Fees—annual fees for marketing and promotion.  Management Fees—annual fees charged by all funds to pay the fund manager.  No-Load Funds—no fee to purchase or redeem shares and low or no 12(b)-1 fees. Mutual Fund Cost Considerations

13-11 Buying and Selling Funds

13-12 Types of Funds  Growth  Aggressive Growth  Value  Equity-Income  Balanced  Growth & Income  Bond  Money Market  Index  Sector  Socially Responsible  International  Asset Allocation

13-13 Bond Funds  Government bond funds  Mortgage-backed bond funds  High-grade corporate bond funds  High-yield corporate bond funds  Convertible bond funds  Municipal bond funds  Intermediate-term bond funds

13-14 Money Market Mutual Funds  General-purpose money funds  Tax-exempt money funds  Government securities money funds  All highly liquid, low risk

13-15  Automatic Investment Plan—mutual fund periodically drafts money from investor's bank account.  Automatic Reinvestment Plan—fund earnings and distributions automatically reinvested in additional shares of fund. Services Offered by Mutual Funds

13-16 Mutual Fund Performance  Returns consist of : 1) dividend/interest income earned by the fund assets; 2) realized capital gains distributions from sale of assets within the fund; 3) change in mutual fund's share price.  Past performance reveals success of fund managers but does not guarantee future returns  Stick with No Loads or Low Loads – load funds that produce superior returns are the exception rather than the rule.

13-17 Investing in Real Estate  Investing in real estate provides greater diversification properties than does holding just stocks or bonds.  Typically exhibits less volatility than stocks, and it doesn’t move in tandem with stocks.

13-18 Basic Considerations of Investing in Real Estate  Cash flow and taxes –Depreciation write-offs reduce taxes –Passive investment  Appreciation in value  Use of leverage –Using borrowed money to magnify returns

13-19 Investing in Income Property  Commercial property  Residential property  Single-family homes

13-20 Real Estate Investment Trusts (REITs) –Closed-end investment companies whose trust assets are limited to real estate investments. –Offer a more diverse and marketable way to invest in real estate. Equity REITs invest in properties Mortgage REITs invest in mortgages Hybrid REITs invest in both Other Ways to Invest in Real Estate

13-21 Mortgage-backed securities Ownership in a pool of mortgage loans GNMA (Ginnie Mae) FNMA (Fannie Mae) Other Ways to Invest in Real Estate