Other Investments |
| Overview | Diversity is crucial to investment success. Taking that into consideration, you should be aware of several other investment options besides the most obvious mutual funds, stocks, bonds and annuities. Three such options are real estate, unit investment trusts and partnerships. Just as with any investment, all three are associated with their own set of risks and rewards. Whether or not they fit into your investment portfolio depends on your goals as an investor. |
Unit Investment Trusts | Unit Investment Trusts (UITs) are similar to closed-end mutual funds. The investment company purchases and holds a fixed number of securities selected to meet a specific investment objective. These securities are packaged into a single investment portfolio (the trust) that is intended to remain fixed over the stated life of the trust. Investors purchase units of the trust which represent a proportionate share of the securities. Unit Investment Trusts generally have low annual expenses for supervisory, evaluation and trust fees. Because the portfolio is fixed, there is no investment management fee. Equity UITs generally charge an initial sales charge of about 1% at the time of purchase and/or a deferred charge which is deducted over several months. The sales charge for fixed-income UITs is usually applied in full at the time of purchase. Some UIT sponsors offer automatic reinvestment of interest to enhance the effect of compounding over the life of your investment. Equity UITs may reinvest in the same trust, while fixed-income UITs may reinvest either in the same kind of trust or in a mutual fund. |
Real Estate | Real estate is not an appropriate investment for everyone, but for those who are interested enough to learn its rules and strategies, it can add diversity, security and big profits to an investment plan. Because real estate exists outside the immediate influence of the financial marketplace, cycles occur slowly over time and are influenced less by the national economy and more by local value. Many people enjoy the tangible aspect of real estate and the ability of the owner to personally manage its outcome. In addition, real estate can be a good way to beat inflation. The rate of increase in the value of real property time and again outpaces the consumer price index. That means just owning a piece of property usually puts you ahead of inflation -- and being ahead of inflation keeps you from losing the real buying power of your money. Keep in mind, though, that it is appreciation that helps you make money. Appreciation is when the worth of your property in real dollars (the net worth minus inflation) increases. Having property that appreciates means that you must choose the right economic, geographic and demographic aspects of the area. Investing in rental property has its own benefits. Income from the ideal rental property will pay all the expenses of the property with a little extra for the investor to spend. Tax advantages of real estate include depreciation; deductibility of debt interest, property taxes and operating costs; tax credits for historic and low-income housing; and tax-deferred exchanges. |
Partnerships | Partnerships are generally the most flexible form of a business for tax purposes, since the income and losses distributed to each of the partners can vary (e.g., one partner can receive 40 percent of any profits but 60 percent of any losses), as long as a business purpose other than tax avoidance can be shown for the split. Partnerships are unincorporated businesses with two or more owners. For businesses with more than one owner, the IRS will presume that your business should be taxed as a partnership, unless you have incorporated under state law or you elect to be taxed as a corporation by filing IRS Form 8832. In the early years of most businesses, the company generates losses rather than profits, and the partnership form allows the partners to use these losses to offset other income they may have from investments or another job. One caveat: the partners may not deduct losses that exceed the amount of their investment in the business. But any losses that can't be deducted as a result of this rule can be deducted in subsequent years if the partner increases his or her investment. A partnership is not a taxable entity under federal law . there is no separate partnership income tax, as there is a corporate income tax. Instead, income from the partnership is taxed to the individual partners, at their own individual tax rates. However, the partnership is required to file a tax return (Form 1065) that reports its income and loss to the IRS, and also reports each partner's share of income and loss on Schedule K-1 of the 1065. |
