13-5 What’s the difference between a load fund and a no-load fund?
Most open-end mutual funds are so-called load funds because they charge a commission when
13-6 What is a 12b-1 fund? Can such a fund operate as a no-load fund?
Also known as hidden loads, 12b-1 fees have been allowed by the Securities and Exchange
13-7 Briefly describe a back-end load, a low load, and a hidden load. How can you tell what
kind of fees and charges a mutual fund has?
Funds that charge a commission—or a redemption fee—when you sell your shares are known as
13-8 What’s the difference between a growth fund and a balanced fund?
The objective of a growth fund is simple—capital appreciation. Long-term growth and capital
13-9 What’s an international fund, and how does it differ from a global fund?
The term international fund is used to describe a type of fund that invests exclusively in foreign
13-10 What’s an asset allocation fund? How do these funds differ from other types of
mutual funds?
Asset allocation funds spread investors’ money across all different types of markets. That is,
13-11 If growth, income, and capital preservation are the primary objectives of mutual
funds, why do we bother to categorize them by type?
13-12 What are fund families? What advantages do these families offer investors?
13-13 What are automatic reinvestment plans, and how do they differ from automatic
investment plans?
Automatic reinvestment is one of the real draws of mutual funds, and it’s offered by just about
13-14 What are the most common reasons for buying mutual funds?
13-15 Briefly describe the steps in the mutual fund selection process.
The selection process itself (especially regarding the types of funds to purchase) obviously plays
13-16 Why does it pay to invest in no-load funds rather than load funds? Under what
conditions might it make sense to invest in a load fund?
13-17 Identify three potential sources of return to mutual fund investors, and briefly
discuss how each could affect total return to shareholders.
13-18 Which would you rather have: $100 in dividend income or $100 in capital gains
distribution? $100 in realized capital gains or $100 in unrealized capital gains?
Between capital gains and dividends in a mutual fund, there is little difference Both the gain
13-19 Describe how to evaluate the attractiveness of investing in an index-based ETF.
The primary reason for investing in an index-based ETF, of course, is to replicate the
performance of the index. It follows that an important aspect of ETF performance is how well it
13-20 How important is general market in affecting the price performance of mutual
funds?
13-21 Define and briefly discuss the role of each of these factors in evaluating a proposed
real estate investment:
a. Cash flow and taxes
b. Appreciation in value
Appreciation in value: Most types of real estate – including everything from raw land to various
13-22 Why is speculating in raw land considered a high-risk venture?
Speculating in raw land is considered a high-risk venture because the key to such speculation is
13-23 Describe the major categories of income property, and explain the advantages and
disadvantages of investing in income property. How can a single-family home be used to
generate income?
The major categories of income property include commercial properties and multi-family
13-24 Describe how the following securities allow investors to participate in the real estate
market.
a. Stock in real estate–related companies
If you buy stock in publicly traded real estate–related companies, you are investing indirectly in
13-25 Briefly describe the basic structure and investment considerations associated with a
REIT. What are the three basic types of REITs?
Critical Thinking Cases
13.1 Damon’s Dilemma: Common Stocks, Mutual Funds, or ETFs?
Damon Bellamy has worked in the management services division of Niche Consultants for
the past five years. He currently earns an annual salary of about $120,000. At 33, he’s still a
bachelor and has accumulated about $100,000 in savings over the past few years. He keeps
his savings in a money market account, where it earns about 3 percent interest. Damon
wants to get “a bigger bang for his buck,” so he has considered withdrawing $50,000 from
his money market account and investing it in the stock market. He feels that such an
investment can easily earn more than 3 percent. Naomi Ladd, a close friend, suggests that
he invest in mutual fund shares. Damon has approached you, his broker, for advice.
Critical Thinking Questions
1. Explain to Damon the key reasons for purchasing mutual fund or ETF shares.
Mutual funds offer professional management with substantial support from security analysts who
2. What special fund features might help Damon achieve his investment objectives?
3. What types of mutual funds or ETFs would you recommend to Damon?
4. What recommendations would you make regarding Damon’s dilemma about whether to
go into stocks, mutual funds, or ETFs? Explain.
5. Explain to Damon the rationale for choosing ETFs over mutual funds.
13.2 Nichole Ponders Mutual Funds
Nichole Whiting is the director of a major charitable organization in Charlotte, North
Carolina. A single mother of one young child, she earns what could best be described as a
modest income. Because charitable organizations aren’t known for their generous
retirement programs, Nichole has decided it would be best for her to do a little investing on
her own. She’d like to set up a program to supplement her employer’s retirement program
and, at the same time, provide some funds for her child’s college education (which is still 12
years away). Although her income is modest, Nichole believes that with careful planning,
she could probably invest about $250 a quarter, and she hopes to increase this amount over
time. Nichole now has about $15,000 in a bank savings account, which she’s willing to use
to kick off this program. In view of her investment objectives, she isn’t interested in taking
a lot of risk. Because her knowledge of investments extends no further than savings
accounts, series EE bonds, and a little bit about mutual funds, she approaches you for some
investment advice.
Critical Thinking Questions
1. In view of Nichole’s long-term investment goals, do you think mutual funds or ETFs are
the more appropriate investment vehicle for her?
2. Do you think that Nichole should use her $15,000 savings to start a mutual fund or an
ETF investment program?
3. What type of mutual fund or ETF investment program would you set up for Nichole? In
your answer, discuss the types of funds you’d consider, the investment objectives you’d set,
and any investment services (such as withdrawal plans) you’d seek. Would taxes be an
important consideration in your investment advice? Explain.
4. Do you think some type of real estate investment would make sense for Nichole? If so,
what type would you suggest? Explain.
Terms Found in the Chapter
12b-1 fee
.
A annual fee that’s supposed to be used to offset promotion and selling
expenses
automatic
investment plan
An automatic savings program that enables an investor to channel a set
amount of money systematically into a given mutual fund.
automatic
reinvestment plan
A plan that gives share owners the option of electing to have dividends
and capital gains distributions reinvested in additional fund shares.
back-end load
.
A commission charged for redeeming fund shares
closed-end
investment
company
An investment company that issues a fixed number of shares, which
are themselves listed and traded like any other share of stock.
conversion
(exchange)
privileges
A feature that allows investors to switch from one mutual fund to
another within a family of funds.
exchange traded
fund (ETF)
An investment company whose shares trade on stock exchanges; unlike
mutual funds, ETF shares can be bought or sold (or sold short)
throughout the day. ETFs are usually structured as an index fund that’s
set up to match the performance of a certain market segment.
general-purpose
money fund
A money fund that invests in virtually any type of short-term
investment vehicle.
government
securities money
fund
A money fund that limits its investments to short-term securities of the
U.S. government and its agencies.
income (income-
producing)
property
Real estate purchased for leasing or renting to tenants in order to
generate ongoing monthly/annual income in the form of rent receipts.
international fund
A mutual fund that does all or most of its investing in foreign
securities.
load fund
.
A fund that charges a fee at time of purchase.
low-load fund
A fund that has a low purchase fee
management fee
A fee paid to the professional money managers who administer a
mutual fund’s portfolio.
mutual fund
A financial services organization that receives money from its
shareholders and invests those funds on their behalf in a diversified
portfolio of securities.
net asset value
(NAV)
The current market value of all the securities the fund owns, less any
liabilities, on a per-share basis.
open-end
investment
company
A firm that can issue an unlimited number of shares that it buys and
sells at a price based on the current market value of the securities it
owns; also called a mutual fund.
pooled
diversification
A process whereby investors buy into a diversified portfolio of
securities for the collective benefit of individual investors.
real estate
investment trust
(REIT)
An investment company that accumulates money by selling shares to
investors, in order to invest that money in various forms of real estate,
including mortgages; this type of fund is similar to a mutual fund, but a
REIT invests only in specific types of real estate or real estate–related
firms.
socially responsible
fund (SRF)
A fund that invests only in companies meeting certain moral, ethical,
and/or environmental criteria.
systematic
withdrawal plan
A plan offered by mutual funds that allows shareholders to be paid
specified amounts of money each period.
tax-exempt money
fund
A money fund that limits its investments to short-term, tax-exempt
municipal securities.
Investing in Mutual Funds, ETFs, and Real Estate
Chapter Outline
Learning Objectives
I. Mutual Funds and Exchange Traded Funds: Some Basics
A. The Mutual Fund Concept
1. Pooled Diversification
B. Why Invest in Mutual Funds or ETFs?
1. Diversification
2. Professional Management
3. Financial Returns
4. Convenience
C. How Mutual Funds Are Organized and Run
D. Open-End versus Closed-End Funds
1. Open-End Investment Companies
2. Closed-End Investment Companies
E. ETFs
F. Choosing between ETFs and Mutual Funds
G. Some Important Cost Considerations
1. Load Funds
2. No-Load Funds
3. 12(b)-1 Fees
4. Management Fees
5. Keeping Track of Fund Fees and Loads
H. Buying and Selling Funds
II. Types of Funds and Fund Services
A. Types of Funds
1. Growth Funds
2. Aggressive Growth Funds
3. Value Funds
4. Equity-Income Funds
5. Balanced Funds
6. Growth-and-Income Funds
7. Bond Funds
8. Money Market Mutual Funds
9. Index Funds
10. Sector Funds
11. Socially Responsible Funds
12. International Funds
13. Asset Allocation Funds
B. Services Offered by Mutual Funds
1. Automatic Investment Plans
2. Automatic Reinvestment Plans
3. Regular Income
4. Conversion Privileges
5. Retirement Plans
III. Making Mutual Fund and ETF Investments
A. The Selection Process
1. Objectives and Motives for Using Funds
2. What Funds Have to Offer
3. Whittling Down the Alternatives
4. Stick with No-Loads or Low-Load Mutual Funds
5. Choosing between ETFs and Mutual Funds
B. Getting a Handle on Mutual Fund Performance
1. Measuring Fund Performance
a. Evaluating ETF Performance
2. What About Future Performance?
IV. Investing in Real Estate
A. Some Basic Considerations
1. Cash Flow and Taxes
2. Appreciation in Value
3. Use of Leverage
B. Speculating in Raw Land
C. Investing in Income Property
1. Commercial Properties
2. Residential Properties
D. Other Ways to Invest in Real Estate
1. Real Estate Investment Trusts
2. Real Estate Limited Partnerships or Limited Liability Companies