Quiz 13: Investing in Mutual Funds, Exchange-Traded Funds, and Real Estate


Person K is planning to invest her extra money. For this purpose she is evaluating two alternatives. One is mutual fund and another one is ETF (exchanged traded fund). She takes the decision by considering some key factors which affects the decision of K. Mutual fund has the pool of the different shares and bonds. The selection of the shares and bonds will be conducted by management team of the mutual fund. ETF also pool of different investments. Thus, this cannot be considered for the purpose of the selection. Selection between mutual fund and ETF can be made based on the following three criteria: • Investment diversification: ETF have a narrow market segment and focuses on a specific industry as compared to mutual funds which are more diversified. The level of diversification may be considered in choosing between the two options. • Tax Management: ETF has a better tax management tool and help in reducing the capital gain taxes as against mutual funds. • Cost: Expenses of the mutual fund is very higher because of their loads and operating expenses. But the ETF has very lower costs when compared with that of mutual fund. The reason to this is ETF has no load and low operating expenses. • Trading time: Mutual funds will be traded at end of the day only but ETF cannot be traded like this. There is no limit for ETF. It can be traded at any time during the day. And the investor can get the price of the ETF on his/her demand. • Return on the investment can be increased when the investment made in ETF when compared that of mutual fund. • Because of the structure of the ETF, it allows the investor to pay less tax when compared to that of mutual funds. Based on the above factors, K can take the decision.

Growth and Income funds are safer when compared to that of growth funds. These funds will invest in high quality of equity. Thus, income and capital gains will be earned. While growth funds invest in stocks with above average growth with above average risk levels. Thus, img are least risky funds. Equity income will invest in quality equity. And high grade corporate bonds will invest in junk bonds with high risk. Thus, less risky funds are img . High yield municipals invest in tax exempted securities issued by government bodies and hence more secure. Intermediate-term bonds are not like high yield municipals. Therefore, img are least risky fund. A balanced fund is safer as is invests in high quality stocks and bonds. Thus, it ensured a stable return along with a capital appreciation. But International funds are risker due to various global factors. Therefore, less risky fund is img .

Investor N purchased the stock at $24.50 per share one year ago. The current price of the share is $26.00. And N received the dividend of $0.40 and capital gains of $1.83 per share. Calculate the rate of return using the formula of approximate yield: img Substitute $2.23 img for income, $26.00 for ending price, and $24.50 for beginning price in the formula: img Therefore, rate of return on the investment of N is img . The results using a handheld financial calculator would return a figure of 15.22% which closest to the approximate yield calculated above. Calculate the rate of return to know whether N earns 20% return if the current price is $30: Substitute $2.23 img for income, $30.00 for ending price, and $24.50 for beginning price in the formula: img Therefore, rate of return on the investment of N in this case is img . Therefore, N earns more than 20% rate of return if the current price is $30.