applying the planning process Chapter 14 Mutual Funds Investment Real Estate and Other Investment Alternatives Where Does This Fit in Your Comprehensive Financial Plan Protection Plan for death and What is a Mutual Fund An investment company is a financial intermediary that pools investors money and purchases other securities with it Each investor owns shares of the fund incapacity Chapters 16 17 Build wealth Save and invest to meet short term and long term goals Chapters 11 15 Secure basic needs Liquidity consumer purchases and credit decisions insurance employee benefits Chapters 5 10 Establish a firm foundation Evaluate your finances acquire tools and skills set goals develop a budget Chapters 1 4 Net Asset Value How a Mutual Fund Works Stocks Bonds Mortgages Investment Company Fund Shares Net asset value is a measure of the value of the assets held by the fund per share NAV Fund assets Fund liabilities of shares NAV Price Transaction costs commissions etc not taken into consideration Individual Investors 1 Open end Versus Closed end Funds Mutual fund is technically an open end investment company No secondary market for the shares MF is required to buy back shares at any time an investor wants to sell Continuously offers new shares for sale price NAV trading costs Open end Versus Closed end Funds Exchange traded Funds ETFs Open end Versus Closed end Funds Closed end Fund Investment company that issues a fixed number of shares that trade on a stock exchange or in the over the counter market Price is determined by market forces Small number of these relative to open end funds Open end Fund Ownership by U S Households 1980 2003 Can issue new shares or redeem old shares like open end funds Traded on an organized exchange like closed end funds Growing in size and popularity particularly index funds Spiders S P 500 ETF Diamonds DJIA ETF Reasons for Mutual Fund Growth Baby boom generation Those born between mid 1940 s and mid1960 s Relatively prosperous generation Less conservative investors Strong economic growth 1980 s and 1990 s stock market did well Employer sponsored retirement plans Other Types of Funds Unit Investment Trusts Investment company that holds fixed portfolio and does not trade Life of UIT ends when last asset matures Real Estate Investment Trusts Investment company that invests in real estate and mortgages Self directed investments 2 Benefits of Mutual Fund Investing Diversification Transactions costs Professional money management Liquidity Other Dividend reinvestment Beneficiary designation Withdrawal options Front end Versus Back end Load Front end Load Most open end mutual funds impose sales charge 2 to 8 up front when you buy the shares One time only Back end Load Contingent deferred sales charge if you sell back your shares too soon after purchase Percent charged usually declines with time Mutual Fund Classifications By Portfolio Asset class Stock funds bond funds REITs Industry or sector Geographic location Index funds Socially responsible funds Costs of Mutual Fund Investing Shareholder Fees One time sales charge load Redemption fee Exchange fee Account maintenance fee Fund Expenses Annual management fee Annual distribution fee 12b 1 Other expenses Mutual Fund Classifications By Objectives Growth Focus on capital appreciation Income Focus on stable dividend interest income Balanced Stocks and bonds Value Seeks undervalued securities Life cycle Asset allocations designed for certain life cycle stages Index Funds A diversified portfolio that tracks an index This may mean the fund buys every stock in the index in proportion to their weight in the index Alternatively fund managers may simply try to mimic the performance of the fund by purchasing a smaller number of securities 3 Real Estate Investing Direct investment Hold title to the actual property Your home Vacation home Rental properties and vacant land Indirect investment You are a part owner of a company that owns the actual property Limited partnership REIT Direct Real Estate Investment Benefits Price appreciation Inflation hedge Leverage Disadvantages Lack of diversification Lack of liquidity High transactions costs Hassle of managing the property Other Investments Precious metals and gems Art and collectibles Paintings Antiques Dolls and toys Speculative investments Options puts and calls futures 4