Quiz 13: Investing in Mutual Funds and Real Estate

Business

I do not need income from my investments, and I have the time and patience to wait out market fluctuations. My risk tolerance is medium. I would select the following categories as they fit my investment requirements • Growth • Value • International a)Research the fund using Morningstar website and entering the fund's ticker symbol. Fund name: T. Rowe Price Blue Chip Growth Fund Ticker symbol: TRBCX Fund manager: Larry Puglia Tenure: since 1993 b)The category, size and style box can be found under the Quote tab on the Morningstar website, as shown below. Category: Large Growth Size: $24.8 bill Style: Large, High Growth c)The loads, fees and other charges can be found under the Expense tab on the Morningstar website. Loads: No load Fees: Expense ratio of 0.74% The minimum investment can be found under the Purchase tab on the Morningstar website. Minimum investment: $$2,500 Minimum investment IRA: $1,000 d)The fund's performance can be found under the Performance tab on the Morningstar website. 1-year performance: 28.91% 3-year performance: 23.39% 5-year performance: 19.69% The Morningstar report contains a summary of the Large Growth category. This fund outperformed the Category (LG) funds. The fund is compared to over 1,000 funds in the Category (LG). The fund did better than the S P 500 index during the same periods. More information about the fund's ranking as compared to other funds in its category can be found under the Quote tab on the Morningstar website, as shown below. e)Information about the fund's dividends and capital gains paid in 2012 can be found under the Quote tab on the Morningstar website, as shown below. Dividends: 0.1350 Short-term capital gains: 0 Long-term capital gains: 0 img f) The current NAV of $69.30 can be found under the Quote tab of the Morningstar website. The total dividends and capital gains paid was $0.1350. The price of the fund a year ago can be found by performing the following steps: Step1: Go to the finance.yahoo.com website Step2: Enter the ticker symbol in the Quote lookup search box. Step3: Click the Look Up button. Step4: Click Historical Prices on the left. Step5: Enter the desired Start and End dates. Step6: The price one year ago comes to "$54.38" Therefore, the price 1 year ago was $54.38. Compute the yield using financial calculator: To find the Interest rate, substitute 1 for number of years, -$54.38 for stock price, 0.1350 for payment and $69.30 for future value. Thus the yield obtained is 27.68% img Therefore, the yield on the fund last year is 27.68%. g)The fund offers automatic reinvestment plans. It is not clear if the fund offers phone switching, but it does offer online switching between fund families. h)I prefer no-load funds as I do not wish to pay to buy or sell the shares. Since T. Rowe Price offers over 90 no-load funds, and has low expense ratios with solid returns, I would select from their list of funds. Since I do not need income from my investments, it was not necessary for me to select a fund that focuses on income. I have the time and patience to wait out market fluctuations and my risk tolerance is medium. Hence, I selected a fund that had approximately average risk. The fund gave solid returns, with a fund manager that had tenure of over 10 years. The fund meets my investment objectives since it is diversified, and gives solid returns for long term. It has high returns compared to its risk. a) Repeated for Value fund Research the fund using Morningstar website and entering the fund's ticker symbol. Fund name: T. Rowe Price Value Fund Ticker symbol: TRVLX Fund manager: Mark S. Finn Tenure: since 2009 b)The category, size and style box can be found under the Quote tab on the Morningstar website, as shown below. Category: Large Value Size: $20.7 bil Style: Large, Core Value c)The loads, fees and other charges can be found under the Expense tab on the Morningstar website. Loads: No load Fees: Expense ratio of 0.84% The minimum investment can be found under the Purchase tab on the Morningstar website. Minimum investment: $$2,500 Minimum investment IRA: $1,000 d)The fund's performance can be found under the Performance tab on the Morningstar website. 1-year performance: 26.10% 3-year performance: 24.85% 5-year performance: 18.21% The Morningstar report contains a summary of the Large Growth category. This fund outperformed the Category (LV) funds, as can be seen below. The fund is compared to over 1,000 funds in the Category (LV). The fund did better than the S P 500 index during the same periods, as can be seen below. More information about the fund's ranking as compared to other funds in its category can be found under the Quote tab on the Morningstar website, as shown below. img e)Information about the fund's dividends and capital gains paid in 2012 can be found under the Quote tab on the Morningstar website, as shown below. Dividends: 0.4100 Short-term capital gains: 0.4000 Long-term capital gains: 1.5500 img f)The current NAV of $37.35 can be found under the Quote tab of the Morningstar website. The total dividends and capital gains paid was $2.3600. The price of the fund a year ago can be found by performing the following steps: Step1: Go to the finance.yahoo.com website Step2: Enter the ticker symbol in the Quote lookup search box. Step3: Click the Look Up button. Step4: Click Historical Prices on the left. Step5: Enter the desired Start and End dates. Step6: The price one year ago comes to "$31.93" Therefore, the price 1 year ago was $31.93. Compute the yield using financial calculator: To find the Interest rate, substitute 1 for number of years, -$31.93 for stock price, 2.36 for payment and $37.35 for future value. Thus the yield obtained is 24.37% img The yield on the fund last year is 24.37%. g)The fund offers automatic reinvestment plans. It is not clear if the fund offers phone switching, but it does offer online switching between fund families. h)I prefer no-load funds as I do not wish to pay to buy or sell the shares. Since T. Rowe Price offers over 90 no-load funds, and has low expense ratios with solid returns, I would select from their list of funds. Since I do not need income from my investments, it was not necessary for me to select a fund that focuses on income. I have the time and patience to wait out market fluctuations and my risk tolerance is medium, so I selected a fund that had approximately average risk. The fund gave solid returns. The only concern I have is that the fund manager has only been managing the fund for 5 years, which is not enough time to determine if the record is consistent. The fund meets my investment objectives since it is diversified, and gives solid returns long term. This is a good diversification from the Growth fund. a) Repeated for International fund Research into the fund using Morningstar at the following website and entering the fund's ticker symbol. Fund name: T. Rowe Price Emerging Markets Bond Fund Ticker symbol: PREMX Fund manager: Michael J. Cornelius Tenure: since 1994 b)The category, size and style box can be found under the Quote tab on the Morningstar website, as shown below. Category: Emerging Markets Bond Size: $4.8 bil Style: Moderate Interest-Rate Sensitivity, Low Quality c)The loads, fees and other charges can be found under the Expense tab on the Morningstar website. Loads: No load Fees: Expense ratio of 0.94% The minimum investment can be found under the Purchase tab on the Morningstar website. Minimum investment: $$2,500 Minimum investment IRA: $1,000 d)The fund's performance can be found under the Performance tab on the Morningstar website. 1-year performance: 11.76% 3-year performance: 5.78% 5-year performance: 8.68% The Morningstar report contains a summary of the Large Growth category. This fund's ranking was not the best in the Category (EB) of funds, as can be seen in the table below. It had good years and bad years when compared to the other funds in the category. The fund is compared to over 100 funds in Category (EB). The fund did better than Barclays US Agg Bond index during the same periods, as can be seen in the table below. More information about the fund's ranking as compared to other funds in its category can be found under the Quote tab on the Morningstar website, as shown below. img e)Information about the fund's dividends and capital gains paid in 2012 can be found under the Quote tab on the Morningstar website, as shown below. Dividends: 0.0616 Short-term capital gains: 0.0000 Long-term capital gains: 0.0000 img f)The current NAV of $13.06 can be found under the Quote tab of the Morningstar website. The total dividends and capital gains paid was $0.0616. The price of the fund a year ago can be found by performing the following steps: Step1: Go to the finance.yahoo.com website Step2: Enter the ticker symbol in the Quote lookup search box. Step3: Click the Look Up button. Step4: Click Historical Prices on the left. Step5: Enter the desired Start and End dates. Step6: The price one year ago comes to "$12.34" Therefore, the price 1 year ago was $12.34. Compute the yield using financial calculator: To find the Interest rate, substitute 1 for number of years, -$12.34 for stock price, 0.0616 for payment and $13.06 for future value. Thus the yield obtained is 6.33% img The yield on the fund last year is 6.33%. g)The fund offers automatic reinvestment plans. It is not clear if the fund offers phone switching, but it does offer online switching between fund families. h) I prefer no-load mutual funds as I do not wish to pay to buy or sell the shares. Since T. Rowe Price offers over 90 no-load funds, and has low expense ratios with solid returns, I would select from their list of funds. Although I do not need income from my investments, I would still like to diversify my portfolio with international funds and/or bond funds. This fund offers both. The fund gave solid returns for its category. The fund manager has been managing the fund for over 10 years. The fund meets my investment objectives since it is diversified, and gives solid returns long term. This is a good diversification from the Growth fund and Value fund.

Mutual fund in a financial service organization which collects the savings of its shareholders and invest in diversified portfolio of securities. The major motive of mutual fund is diversification which protects the investors indirectly from the exposure of risk by investing in several types of securities and companies instead of investing in just one or two. Another major important benefit of using mutual fund is the professional management. These professional managers know where to invest and how to avoid risk, their decisions helps to earn more profit than the average investors could achieve.

1)The key reasons for purchasing mutual funds or ETF shares are: • To diversify a portfolio. Each mutual fund or ETF contains a number of different stocks. For mutual funds, the investor can select from such categories as Index funds, Growth, Value, International, Bonds, and REITs. For ETFs, the investor can select from such categories as Financials, Real Estate, Energy, Oil and Gold. • To allow the investor with a small starting capital to invest. It is costly to purchase stocks of individual companies since the investor typically purchases round lots of 100 shares at a time. Share prices range from pennies to hundreds of thousands of dollars per share. Mutual funds and ETFs often allow the investor to start investing with only a few thousand dollars. • To obtain the expertise of professional money managers, the mutual funds and ETFs are managed by professionals whose job is to pick shares that correspond to the style depicted in the mutual fund or ETF description. • To obtain a wide array of services offered by the investment company, offer the mutual fund or ETF, such as retirement accounts and financial advice. 2)The following fund features might help Person T achieve his investment objectives: • Most mutual funds and ETFs can be purchased in a retirement account such as a 401k or Traditional IRA. By doing so, Person T would be able defer federal and state income taxes on both the principal invested and any dividends or capital gains until the money was withdrawn. This would help Person T keep more of his money and hence earn more than 3%. Note that annual contribution limits apply. • Most mutual funds and ETFs can be purchased through periodic automatic withdrawals from a back account. Person T could set up such withdrawals and save the money automatically each month, to add to the $50,000 he is starting with. • Most investment companies allow the investor to switch within a fund family easily online. As Person T gets more comfortable, he could switch to another mutual fund within the fund family if he feels that is more appropriate. 3)Since Person T works at company FC, I would assume he already knows something about stocks, mutual funds and ETFs. He could invest in an ETF in a sector that he is familiar with. Since he works at Company FC, he may want to purchase a Financials Index ETF. There are many other ETFs to select from. Since person T is most likely well-informed about financial matters, he can look into the economic conditions surrounding a few of the sectors of ETFs available, such as Gold, Oil, Energy, Real Estate, Health Care, Consumer Staples, Consumer Discretionary, Industrials, Information Technology, Materials, Telecommunications and Utilities. Person T can then use this knowledge to select an appropriate ETF. ETFs work well for those with large sum of money for investing. Since Person T has $50,000, to start with an ETF would be appropriate. Since he is a long way from retirement, is not married, he can afford to take more risks with his money. Investing in ETFs is riskier than investing in mutual funds, but can offer higher rates of return than mutual funds. Since Person T is far from retirement, he may not want the funds in a retirement account. ETFs are designed to protect investors from capital gains taxes better than mutual funds are. If Person T is not knowledgeable about stocks, mutual funds and ETFs, then I would suggest Person T purchase shares of no load mutual funds. These funds do not charge the investor to buy or sell shares. Since he wants "more bangs for his buck", is a long way from retirement, is not married, and wants to invest $50,000, which is a reasonably large sum to start with, he can take a few moderate risks with his money. For these reasons, I would suggest that he invest in Growth, Value, International, Large Cap, Mid Cap and/or Small Cap stocks. Since he earns $120,000 a year, he does not need income from his investments, so it is not necessary for him to purchase shares in a fund that hold bonds or that focuses on dividends. 4)Since Person T works at company FC, I would assume he already knows something about stocks, mutual funds and ETFs. If he doesn't then he should work on a progression from one to the next as his knowledge increase. If Person T is unfamiliar with stocks, he should start by investing the $50,000 into mutual funds. This is because mutual funds offer a wider range of diversification in the stocks they hold. This will lower his risk. Due to the greater diversification and lower risk, he can expect that the value of his investment will not fluctuate as much as it would with ETFs or stocks. While Person T invests in mutual funds, he should learn about market conditions and the economy. I would suggest that he read The Wall Street Journal, and the news on www.finance.yahoo.com, as well as compare mutual funds using Morningstar. When he feels comfortable, he could invest in ETFs. ETFs are more narrowly focused than mutual funds. ETFs focus on a single sector, industry or geographic region, so he will need the information that he has gained from his readings to help him determine which ETF to invest in. As Person T increases his knowledge, and the amount of money he has increases, he can start trading in stocks. It takes a considerable amount of resources to purchase individual stocks to form a well-diversified portfolio. Person T will, by this time, have come to know his tolerance for risk, as well as to understand his own personality when it comes to investing, and to select a stock investment style that is cohesive with his personality. 5)ETFs have the following advantages over mutual funds: • ETFs are designed to protect investors from capital gains taxes better than mutual funds are. This would be important if the funds are in a taxable account. • ETFs typically have lower expense ratios than mutual funds. • ETFs are more cost effective for investors who are investing large sums of money.