Managing Personal Finance - Essay Example

UNDERGRADUATE SPRING PROJECT WORK: PERSONAL FINANCE Business Portfolio for the period between May May 31, SUBMITTED BY SUPERVISION BY Table of Contents CHAPTER I: MANAGING PERSONAL FINANCE 3 Introduction 3 Rationale 3 Investment Goal 4 Objectives 4 Philosophy 4 CHAPTER II: INVESTMENT PORTFOLIO 7 6 Stock Investments 6 Bank Deposits 8 Gold and Metal Investments 9 CHAPTER III: RETURN OUTCOMES 11 Profits from the Stocks 11 Profits from Bank Deposits 12 Profits from Gold and other Metals 12 Total Returns 13 Conclusion 13 References 14 CHAPTER I: MANAGING PERSONAL FINANCE Introduction Among the many different goals in life, finance management plays the most critical role. Financial management is responsible for affecting a host of different areas in a person’s life. The modern day world has a number of investment options offering wide array of investment choices, which range from fixed return bearing securities to high risk high return assuring securities. With increased globalization, the world has become more complex in the financial world. Banks offer a huge range of investment options and so do the different markets. Currently, people also have access to the international market. All these make it extremely confusing for a layman to choose the best options for management of his money. The aim of business portfolio management course was to make one understand different financial products that are available to an individual and the desired mix of assets that shall assure certain amount of returns and ways of conducting a better financial management of one’s portfolio. The paper is a study of management of personal finance under a mock scenario, where the student has to manage a portfolio of stock market, metals in the international market as well as bank deposits in banks that belong to Non Islamic category in Qatar. The case provides the student with a startup capital of QR 1,000,000 million along with the freedom to make investments in various investment options available. The investments are made as per discretion of the investor, inclusive of his personal investment strategy and rationale. The paper also highlights objective of the investment scenario, along with a clear presentation of the strategic investment portfolio. The risk return trade off considered by the investor is emphasized and the paper concludes with an estimation of return of the individual at end of the investment period. Rationale The rationale of this project is to determine the level of investment understanding of students, after the course of finance. The project is an assessment and a practical understanding of the investment management course undertaken as a part of this course. The project is also a presentation of a mock investment portfolio based on past data of the markets, which portrays a practical view of the real investment scenario and portfolio management case for a finance manager. The project provides insights into the broader real case scenario with help of a hypothetical situation that is presented to the investor. The investor shall invest in a minimum of 3 stocks at a time and maintain portfolios in Gold and other metal. Besides that, he shall also make some designated deposits with the banks to ensure a well-balanced portfolio for obtaining desired rate of return. Investment Goal The goal of the investment is to attain at least 10% profit over the provided amount that has to be invested, which is QR 1,000,000 million. The investor believes that it is only rational to assume and target a 10% profit within the limited timeframe of 30 days or a month. The aim of the project is to make this scenario as real as possible. The investor is aware that in reality, the broad situation shall not present historical data for making profits at a future date. Based on this particular drawback, a rational target of a 10% profit on the total portfolio is assumed. Objectives The prime objectives of this paper can be presented as below: 1. To earn 10% profit on the invested amount of QR 1,000,000 million 2. To allow for a good mix of stocks, bank deposits and metal investment, such that the risk portfolio is properly balanced between high risk and low risk investments. 3. To be able to provide reasonable ground for proposed investments and to give rational justifications for the investment portfolio that is chosen. Philosophy The philosophy behind allocation of money in different types of risky and risk free assets is to have a balanced portfolio that does not venture excessively into risky assets and is adequately supported by risk free assets in order to secure targeted and estimated returns. For this purpose, the investor chose to invest 65% of the money in risky assets, which is the stock market and Gold and other metals market and keep 35% of the investment safe in risk free assets that are bank deposits. Table of Asset Allocation expressed in percentage basis Investment Type Percentage Allocated Stocks 50% Bank Deposits 35% Gold and Other Metals 15% CHAPTER II: INVESTMENT PORTFOLIO 7 Stock Investments The project started on 1st May 2014 when the investor was given QR 1,000,000 million to be invested in a mix of stocks, Gold and other metals and bank deposits. The investors had conducted extensive market study over different stocks that were listed on Qatar Stock Exchange and decided to invest in the top stocks only. It was ascertained that tracking of top stocks shall be easy because they were the ones for which required information would be readily available over the internet or other sources such as, newspapers and magazines. In addition, the investor decided that only 3 stocks shall be chosen at a time for the purpose of making market linked investments or risky investment. Such stocks shall belong to two sectors, only so that tracking and monitoring of the stocks is facilitated. It is to be noted that stock markets for all stock exchanges had closed down on 29th of May because of the following weekend on 30th and 31st May. Hence, all the investments have been made form 1st May 2014 to 29th May 2014. The investors initially put 50% of the amount, which is QR 500,000 million into the stock market. This money was split in three stocks markets namely, Dow 30, S & P 500 and Qatar Stock Exchange. The focus was primarily on two main sectors, which is telecom and finance. The initial choice of stocks was made on the basis of fundamental analysis of stocks. The investments were made as below. 1st May to 6th May Buy Sell Quantity Amount Total Revenue Vodafone (Qatar Stock Exchange) 16.7 18.95 8982.04 150000 170209.58 Qatar Bank (Qatar Stock Exchange) 87 90 1724.14 150000 155172.41 AAPL (S & P 500) 2130.91 2196.36 93.86 200000 206143.35 (Source: Currency.Me, 2014B; Investing.com, 2014) The first set of investments was made from 1st May to 6th May, 2014. The stocks chosen were of Vodafone and Qatar bank from Qatar Stock Exchange and Apple Inc. from Dow 30. The choice of banking and telecom was taken with the rationale that after the recent financial crisis, banks and the financial sector in general are experiencing a revival and this act of strengthening of markets shall be largely coming from the banking sector. On the other hand, the telecom boom is majorly hitting markets all across the world. The recent rise in competition in telecom stocks can be attributed to high competition and innovation in the telecommunications industry wherein Apple is a prominent player. For the purpose of the first set of investments, Vodafone was chosen because it is entering and playing big in the Middle East markets. Additionally, the choice of Qatar bank owes to its present market strength, in terms of being the largest Islamic bank in Qatar. The Islamic banks are also experiencing a huge revival and support from the government in order to revamp its business in different Islamic nations. The amount invested in the Qatari stocks was 30% of the total amount allotted for stock markets and amount invested in Apple was 40% or QR 200,000 million. The break up and prices have been highlighted in the table below. 6th May to 12th May 2014 Buy Sell Quantity Amount Total Revenue MSFT (Dow 30) 142.90 145.45 1191.03 170210 173241.30 Qatar Bank (Qatar Stock Exchange) 88 90.9 1763.32 155172 160286.05 MARK (Qatar Stock Exchange) 48 50.4 4294.65 206143 216450.51 (Source: Currency.Me, 2014B; Investing.com, 2014) On 6th May, the revenues generated from Vodafone are invested in another telecom stock in US, Microsoft with the Dow Jones 30. The revenues of Qatar bank are reinvested in Qatar Bank, assuming good returns from the banking stock. The revenues generated from Apple Inc in US are put into MARK, another banking stock on the Qatar Exchange. The stocks generate positive revenues and their investment details have been presented as below. 12th May to 29th May Buy Sell Quantity Amount Total Revenue Vodafone (Qatar Stock Exchange) 18.2 20.7 9518.75 173241 197038.19 MSFT (Dow 30) 144 148.91 1113.1 160286 165750.35 AAPL (S & P 500) 2152.72 2341.82 100.55 216451 235463.06 (Source: Currency.Me, 2014B; Investing.com, 2014) On 12th May, the investor cash out of the 2 banking stocks on the Qatar exchange and Microsoft from the Dow Jones with positive returns. The proceeds are invested in another telecom stock, Vodafone, on the Qatar Exchange. Vodafone has shown great fundamental strength and sound profitability in the past, which makes it a preferred choice over the Qatari markets for the investor. Bank Deposits The bank deposits are expected to be among the safest options for investment among various investment options available. The risk with bank investments is close to zero because they allow for an assured return. The investor invests in a time deposit. The fixed deposit scheme was not available for a period of one month. The rate of return of Qatari commercial banks or non Islamic banks is negotiated at 1.25%. The total money invested in the metals is about 35 percent of the total amount invested and hence, the value invested is QR 350,000 million. For the purpose of investment within the scope of this project, the investor chose Commercial Bank of Qatar. Since the amount of deposit was higher than the specified declared limit of QR 500,000 million, investor negotiated the interest rate at 1.25% for a period of 1 month (CBQ, 2014). The rationale behind the choice of Commercial Bank of Qatar is that it is the leader in investment banking in Qatar. It remains to be one of the most reputed commercial banks of the country and has been rated to be persistently stable by Moody’s Credit Rating Agency. This bank is also offering stiff competition to other foreign commercial banks in the country, which also includes HSBC. In addition to that, interest rates negotiated with Commercial Bank of Qatar were best among all and as a result, the investor decided to put money in the bank that yielded highest returns for the portfolio. Term Deposit for 1 month Amount Rate Return Amount 350000 1.25% 4375 354375 Gold and Metal Investments The Gold and other metals market is another risky investment whose returns are linked to the market performances of these metals. The investor has chosen to invest in four popular metals, namely Gold, Copper, Platinum and Palladium. The metals have been invested in equal amounts. The total money expended in the metals is about 15 percent of the total amount invested. Thus, the value invested is QR 150,000 million. The rationale behind choice of Gold is that it is one of the most valuable metals, which have been experiencing quite a rally in the international market in the recent times. The price for Gold has been consistently rising. Copper is the metal, which has been showing consistent performance over a very long period. It has been quite stable in the market and the returns from this are not expected to show high fluctuation. The investor decides to play between two metals within a specific time period for investing. This shall allow better judgment and sound analysis of market entry and exit strategies. The initial investments were split into 50-50 between Gold and Copper. The rationale for choice between them was that the investments were split between a volatile and a stable commodity. The international market rates have been converted into Qatari Riyal in order to allow for better judgment. 1st May to 6th May Buy Sell Quantity Amount Total Revenue Gold 4675.49 4761.71 16.04 75000 76383 Copper 10.92 11.11 6868.13 75000 76299 6th May to 14th May 2014 Buy Sell Quantity Amount Total Revenue Platinum 5287.45 5384.73 14.45 76383 77788 Palladium 2953.64 3015.27 25.83 76299 77891 15th May to 29th May Buy Sell Quantity Amount Total Revenue Copper 11.42 11.55 6810.50 77788 78655 Platinum 5333.45 5322.73 14.60 77891 77734 (Source: Bullion-Rates, 2014; Currency.Me, 2014A) Gold investments were pulled out on 6th May 2014 because of the expectation of a slowing global economy owing to contraction bout in the Chinese manufacturing segment. It was anticipated that such contraction shall impact the Gold market shortly. The US equity market was also experiencing a boom, which would have led to a slowdown in the Gold markets. The investments were restricted to Platinum, Palladium and Copper after 6th May 2014. The growing tensions in the Ukraine markets and its possibility of entering into war with Russia were expected to raise prices of precious metals such as, Platinum. As a result, on 6th May, investments were made in the metal. Russia is one of the largest producers of Platinum globally. Additionally, in order to maintain a balance, Palladium investments were made for stable returns. The switchover from Palladium to Copper on 15th May 2014 was based on the grounds that South Korean plants were anticipated to become functional in the period, which might have raised prices for Copper in commodities markets. However, anticipating the weekend that followed, a number of investors pulled out of the Copper market, thereby leading to a fall in Copper prices when investment had to be closed for the purpose of this project. CHAPTER III: RETURN OUTCOMES It is believed that the portfolio of stocks had been adequately diversified. The choice of stocks was limited and the exposure too was in 2 sectors. This might be seen as a weakness of the diversification attempt in the share market dealings, but the rationale for adhering to only two sectors was supported by research of the investor who felt that there was a strong pull factor in the sector and he in turn wanted to tap the potential of the division. Profits from the Stocks The total profits generated from the stock market investments were about QR 98252 approximately. The exchange rates between Qatari Riyal and USD have been considered for changes in price of stocks. The exchange rate between USD and QR is fixed at 1USD=1/0.275 QR. The highest percentage of returns was generated from the telecom sector where the strongest rally was shown by Vodafone in the Qatar Exchange. The total profit percentage generated from the stock market has been 20%. This is considerably higher than the targeted 10% and it can be safely said that the portfolio of stocks have been timed and managed appropriately. 1st May to 6th May Quantity Amount Total Revenue Returns Vodafone (Qatar Stock Exchange) 8982.04 150000 170209.5808 20209.6 Qatar Bank (Qatar Stock Exchange) 1724.14 150000 155172.4138 5172.41 AAPL (S & P 500) 93.8567 200000 206143.3447 6143.34           6th May to 12th May 2014 Quantity Amount Total Revenue Returns MSFT (Dow 30) 1191.03 170210 173241.3037 3031.72 Qatar Bank (Qatar Stock Exchange) 1763.32 155172 160286.0502 5113.64 MARK (Qatar Stock Exchange) 4294.65 206143 216450.5119 10307.2           12th May to 29th May Quantity Amount Total Revenue Returns Vodafone (Qatar Stock Exchange) 9518.75 173241 197038.186 23796.9 MSFT (Dow 30) 1113.1 160286 165750.3473 5464.3 AAPL (S & P 500) 100.547 216451 235463.0569 19012.5 Profits from Bank Deposits The profits earned from bank deposits were about 1.25% of the total amount invested. The total amount invested was QR 350,000 million, while the total returns generated was about QR 4375 million. Bank deposits associate a very low rate of return, primarily because the period of investment was very small. Furthermore, the banks assure of guaranteed returns, which lowers the risk associated with the investment down to zero. Low risk always entails a low rate of return and hence, the investor is assured that at least 1.25% returns were generated from the money invested. Term Deposit for 1 month Amount Rate Return Amount Return 350000 1.25% 4375 354375 4375 The investor is satisfied with this investment primarily because it was the best rate that could be negotiated for bank deposits. Additionally, there was an assurance of some return on 35% of the amount invested in fixed income investment. The total returns generated form bank deposits is QR 4375 million, which provides 1.25% return on the total amount invested. Profits from Gold and other Metals 1st May to 6th May Quantity Amount Total Revenue Returns Gold 16.04 75000 76383 1383 Copper 6868.13 75000 76299 1299 6th May to 14th May 2014 Quantity Amount Total Revenue   Platinum 14.45 76383 77788 1405 Palladium 25.83 76299 77891 1592 15th May to 29th May Quantity Amount Total Revenue   Copper 6810.50 77788 78655 867 Platinum 14.60 77891 77734 -157 The returns from the metal market investments are mostly positive except for the case of Platinum investment on 15th May 2014 to 29th May 2014. The returns have not been very high because of stable returns from the market. In addition, diversification of risk between volatile and stable metals also averaged out the profits or returns generated from stocks. The total amount invested in the commodities market was QR 150,000 million and the total returns generated was about QR 156389 million, which in turn provides with a total profit of QR 6389 million. The total percentage of returns generated from the commodities markets was about 4.25%, which is below average according to the investor. It is believed that with higher tracking and research of the portfolio as well as investing in more volatile metals like, Gold and Platinum, the portfolio could have earned better returns. As a result, performance in the commodities sector is below average. Total Returns Category Amount Invested Amount Received Return Return Percentage Stocks 500000 598251.5903 98251.59 19.65% Bank Deposit 350000 354375 4375 1.25% Commodities 150000 156389 6389.354 4.26% Total Return Percentage 25.16% The total returns yielded from different categories of investments have been presented above. The stock investments have generated the highest amount of returns, while the bank deposits have provided with the lowest return. Nevertheless, the total returns generated within a period of 1 month have been above 25% and this is a significant achievement as per opinion of the investor. The project aimed at gaining a 10% return in total and the achievement in the actual portfolio was 25%. The investor considered this as an impressive performance. Conclusion In conclusion, it can be said that the practical insight into investment portfolio management had been an engaging study. It is, however, understood that the real life case shall be considerably more difficult, when the investments have to be made based on past data and there shall be no future dates and prices available as in this case. So, the returns shall be lower and the risk scenario would be very high. This shall call for deeper study into each investment and greater analysis of each stock, commodity and such risky investment. Therefore, one should realize that managing a portfolio of investments or personal finance should comprise a good mix of risk free and risky assets. This will help to maintain the desired return as far as possible. References Bullion-Rates, 2014. Gold Prices. Retrieved from: http://www.bullion-rates.com/Gold/PKR-history.htm CBQ, 2014. Deposit Rates. Retrieved from: http://www.cbq.qa/EN/Advice-and-information/Information-library/Rates-indices-and-charges/Pages/Deposit-rates.aspx Currency.Me, 2014A. Convert Qatari Riyal to Pakistani Rupees | QAR to PKR. Retrieved from: http://www.currency.me.uk/convert/qar/pkr Currency.Me, 2014B. Convert Dollars to Qatari Riyal | USD to QAR. Retrieved from: http://www.currency.me.uk/convert/usd/qar Investing.com, 2014. Stock Prices. Retrieved from: http://www.investing.com/markets/qatar Read More