About the Investment Options - Research Paper Example

Table of Contents Introduction 2 About the Investment options 2 Mutual Fund 2 Gold 3 Fixed term bonds 3 4 UK government bonds 4 Equity 4 Savings Account 5 Investment Analysis and expectations 5 Mutual Fund 5 Gold 7 Fixed term bonds 7 UK Government Bonds 8 Equity 9 Savings Account 11 The proposed portfolio 11 Conclusion 12 References 15 Introduction Portfolio investment is the way to maximize the wealth of investors. In this method different options are selected for investment based upon the embedded risk, performance or expectations regarding that particular investment option. In an investment portfolio, each investment is given individual allocation of the total corpus of investment. The first step before designing any portfolio is obviously the self assessment of the investor. Self assessment includes assessing the risk tolerance, the expected return by the investor and also the time horizon for which the investor is ready to keep his/her money invested. Supposing the investor is moderately risk taker but expecting more than average return and time horizon is 5 years. About the Investment options Mutual Fund Mutual Fund is professionally managed pool of assets. Assets are collected from many investors. It is then invested into equities, bonds, money market instruments and other investment options. Mutual funds are open ended or closely ended investment options. The option to pull back the investment amount anytime is available with the investors. The number of units to be allotted for any individuals depends upon the amount of investment and the prevailing NAV of the company in the market. Suppose, £500 is invested and the present NAV of the company is £5. The number of allotted units to the investor will be (500/5 £) 100. Investor has to pay a nominal fee for their investments. Mutual funds are professionally managed, so the chances of losing money are also minimal than investing directly in shares. The diversified nature of mutual funds also keeps the risk level within nominal range. Due to diversification, less return from one company or sector gets easily nullified by the higher return by other company/sector. Gold Gold is possibly the most invested metals around the world. It is also the universally accepted medium of exchange. In accounting prospect, the depreciation value of gold is almost zero. Gold is also believed to be worked as inflation hedge. In most of the times gold has negative correlation with the performance of share market. This is why people prefer gold as their investment option when the equity market is underperforming. Fixed term bonds Fixed term bonds are the means of getting fixed interest amount after specific period of time. Fixed term bonds have the maturities ranging from 6 months to 5 years. It may vary depending upon the need of the corporate and also upon the market condition. These bonds are issued by corporate bodies. There lays a default risk embedded with this kind of bonds. If the issuer company goes bankrupt, the investors may loss the entire money or a part of their total investment. UK government bonds Like other bonds, UK government bonds offer fixed amount of interest to the investors. These are bonds are government backed bonds. It is the safest of all kinds of investments. Governments bonds are generally issued at discount. The discount rate is the coupon rate attached with the bond. These bonds are traded in the debt market as like the other securities. The government bonds are available in the market with large variety of maturity periods and different coupon rates. Govt. bond is redeemable after its maturity date. The maturity periods offered by these bonds varies from 3 month to 30 years. The risk associated with these bonds is nil, as the Government of UK has the guarantee for these bonds. (U.K. GOVERNMENT BONDS, 2009) Equity Equities are the shares of the publicly listed companies. Among all types of investment options, Equities are found to be the most risky investments after derivatives. The performance of equity in the recent year is terrible. All the shares are available in much lower prices as compared to their previous trading session’s year before. Investors can easily invest in equity through buying of shares of a particular company at the prevailing rate in the market. The switching from one share to another is also possible by paying nominal amount of brokerage. Savings Account Savings accounts are maintained by financial institutions and banks. Interests are paid on monthly, quarterly or yearly basis against the deposits in savings accounts. A user can easily open a savings account with some nominal amount. This is the most liquid form of investments. Account holders have unlimited access to these accounts. Withdrawal or deposit of money from or to the account is permissible through ATM counters or directly through bank counters. Investment through this channel is not entitled to any kind of tax reliefs. This can be a best solution of investment if the investor does not want to block its money for any span of time. Investment Analysis and expectations Mutual Fund For the selection of mutual fund, the focus was upon the companies and sectors on which the fund under consideration is investing. The 52week high/low prices are also being observed for the better assessment of the fund. The beta value, which determines the correlation between NAV and market return, is also being observed. Fund Name Present NAV 52 week high/low Beta Sector Invista European Real Estate Trust 19.5 133.25/5.55 1.12 Real Estate Principle Capital Investment Trust Plc 34.5 51.5/15.5 NA Equity Invista European Real Estate Trust is fund is a closed ended fund. This fund invests into various prospective commercial real estates across Europe. The fund has performed badly generating negative return of -84.14% over the last year. Housing market collapse is the main reason for this downturn. With the rise in economy, consumer spending will also go up. If the consumer spending capacity as well as intensity goes up, there will be a rising trend for the consumers to go for better lifestyle. This will ultimately push up the price of houses in the near future. Thus this fund is expected to perform very well within 2-3 years. Investia European Real Estate fund is expected to generate a demand within the range of 20-30% within next 3-4 years. (Invista European Real Estate Trust, 2009). Principle Capital Investment Trust Plc is focusing into equity investment into various publicly traded companies in UK and other region. Due to its exposure in markets outside UK, the fund is expected to invest into lucrative shares in other regions. The fund will definitely take the advantage of buying shares which are available in the market at discount prices. The fund has generated negative return of -31% in past one year. But the company has generated return of 50% during last three month. Principle Capital Investment Trust fund is expected to generate return of around 50% within next 2-3 years. (PCIT:EU Principle Capital Investment Trust Plc, 2009) Gold Investment in gold can be made through different ways. Gold deposit schemes, gold exchange traded funds and buying gold bars or coins are the available options to invest in gold. Due to recent financial crisis the gold price has become much volatile than it was year before. Gold is expected to give at least 10% return year after year, for next 5 years. And investment in gold will be in the form of bars. (Gold Price 2009 - Friday 19th December 2008, n.d.) Fixed term bonds Among all the bonds, 9 month bond offered by Halifax Plc is selected as the investment option. The bond is to give return of 3.35% in just 9 months. Minimum investment for this bond is £500. (Halifax Plc, 2009) UK Government Bonds Bond Type  COUPON Maturity Date Current price/yield PRICE/YIELD Change TIME 3-Month 0 8/3/2009 99.87 / .55 0.008 / -.026 13:34 6-Month 0 11/2/2009 99.71 / .58 99.714 / .581 13:34 1-Year 4.75 6/7/2010 104.38 / .70 -1.48387097 13:34 2-Year 4.25 3/7/2011 105.71 / 1.10 -2.12903226 13:34 3-Year 5 3/7/2012 108.24 / 2.00 -3.23809524 13:34 4-Year 4.5 3/7/2013 107.71 / 2.39 -4.06896552 13:34 5-Year 5 9/7/2014 112.81 / 2.43 -5.68421053 13:34 7-Year 4.75 9/7/2015 111.11 / 2.82 -6.30769231 13:34 8-Year 4 9/7/2016 106.59 / 2.99 -6.91666667 13:34 9-Year 5 3/7/2018 112.71 / 3.33 -8.42857143 13:34 10-Year 4.5 3/7/2019 107.79 / 3.55 -8.625 13:34 15-Year 5 3/7/2025 108.69 / 4.24 0.086 / -.007 13:34 20-Year 4.75 12/7/2030 105.25 / 4.37 0.03 / -.002 13:34 30-Year 4.75 12/7/2038 106.32 / 4.37 0.177 / -.010 13:34 From the wide base of bonds offered by UK government bonds, the 5 year bond is selected for the investment. The reason behind is, the coupon rate is the highest among all other bonds (5%). Other bonds having 5% coupon rate have the tenure of 9 and 15 years. The investment horizon considered for this portfolio, has the tenure of 5 years. So, the best combination can only be 5% bond with 5 years of maturity. (U.K. GOVERNMENT BONDS, 2009) Equity Shares are selected from the FTSE 100 constituents. FTSE 100 shares are fundamentally strong and have strong market influence. FTSE constituents have good market image and also strong book value backup. Most of the companies among FTSE 100 are giving good performance in terms of revenue and shareholders wealth. Present trading prices of these companies are also lower compared to its 52 weeks high prices. This price comparison can determine about the potential of the company’s share. Company Beta 52 week high/low Trading price Investment Dividend yield Cairn Energy Plc 1.263 3,733/1,125 2,252.000 Vedanta Resources PLC 1.637 2,788/358.75 1,298 2.036 Carnival PLC 1.089 2,153/1,055 1,922 3.985 Cairn Energy traded at the price of 3709 on May 21, 2008 and was around its 5 high price. Comparing the present price it is said that the share is available at 39% down from its peak within one year. Beta of 1.263 indicates that the increase of shareholder’s wealth will be 1.263 times than that of market. The share is expected to rise by at least 35% within next one and half year. (CNE:LN Cairn Energy Plc, 2009) Vedanta Resources has offered -43.42% return over one year. The company is into metal sector. Due to the global demand crunch and unstable economy the performance of Vedanta for last one year is very poor. With the rise in demand cycle, the company is sure to perform well in the share market. Beta of 1.63 is certainly a good factor in terms of getting exceptional return than that of market return. Company is expected to give return of 30% within next one year. (Vedanta Resources PLC, 2009) Carnival PLC is a moderately risky stock. Its beta of around 1 indicates that the share price of this company will move almost along with the market. If the market is up by 5 units then the share price of Carnival will also move by 5 points. After a downturn of more than a year, FTSE 100 is expected to perform exceptionally in the near future. The market return is expected to be in the range of 15-20% for next one year. So, the return generated from Carnival will also be in the range of 15-20% for the next year. Company has also a good dividend yield of around 4%. This is also a positive factor behind investment into this share. Carnival is mainly into business of Cruise. With implantations of various stimulus packages by various governments around the world, the economy is expected to revive very soon. With the revival of economy the demand for cruise travel will also go up. As a whole Carnival can be a better option for investments with minimum risk. (Carnival PLC, 2009) Savings Account With the downfall of economic condition the interest rates offered by banks in savings account has come down drastically. This is the time for the investors to choose the banks or financial institutions which are offering highest interest rates. At present, the interest rate offered in saving account is less than 3%. Top two options in this regard are ICICI and Newcastle. ICICI is offering 2.95% interest rate for deposits £1 or more. Whether, Newcastle is providing interest rate of 2.84%. Minimum deposit of £250 has to be kept for Newcastle. The amount invested in saving account will also serve as the reserve money for the investor. So that in case of any diverse conditions, investor can easily uses the fund lying within the saving account. (Haurant S., Desperately seeking a sensible savings rate, 2009) The proposed portfolio Conclusion Selecting right investment options is not the sole criterion for making the right investment portfolio. Next step will be selecting the right time to go for the above mentioned investments. Investors should not be in hurry regarding investment. The market should be closely analysed and investment should be made at that particular time when the prices of those particular investment options are lower. If right price and time is selected for the investment, the investor is expected to get the full benefit from that investment options. Generally investors joined the rally of any particular investments. This situation must be avoided. The timing should be such, when the prices are anticipated to discount all the information regarding that investment option. After deciding the correct time, the next step is to waiting for the right time to offload the investments. For this continuous evaluation of the portfolio is the most important factor. Investor should divest at right time from any invest option. The divested amount can further be reinvested if the situation is favorable. Switching of investment options can also be a better option, if done effectively. But investors should not be in a hurry during this stage. “Wait and watch” can be the best approach during this stage. Another point that is to be considered by any smart investor is that it is never advisable to put all the eggs into the same basket. Investor may offload the amount of investment into that investment option, which is giving highest return. These will not be a wise decision by an efficient portfolio investor. Because what that is happening today may not repeat in the near future. So, it is better to adopt diversification approach always. Allocating funds in different investment areas will reduce the overall risk of the portfolio. And thus investor is expected to earn handsome return from a diversified portfolio. References 1. U.K. GOVERNMENT BONDS, 2009, Market Data-Bloomberg, [Online] Available: http://www.bloomberg.com/markets/rates/uk.html , [May 5, 2009] 2. CNE:LN Cairn Energy Plc, 2009, Bloomberg, [Online] Available: http://www.bloomberg.com/apps/quote?ticker=CNE%3ALN , [May 5, 2009] 3. Carnival PLC, 2009, Bloomberg, [Online] Available: http://www.bloomberg.com/apps/quote?ticker=CCL:LN , [May 5, 2009] 4. Vedanta Resources PLC, 2009, Bloomberg, [Online] Available: http://www.bloomberg.com/apps/quote?ticker=VED:LN , [May 5, 2009] 5. Invista European Real Estate Trust, 2009, [Online] Available: http://www.bloomberg.com/apps/quote?ticker=IERE:LN , [May 5, 2009] 6. PCIT:EU Principle Capital Investment Trust Plc, 2009, [Online] Available: http://www.bloomberg.com/apps/quote?ticker=PCIT:EU , [May 5, 2009] 7. Halifax Plc, 2009, Fixed Term Bonds-Money Supermarket, [Online] Available: http://www.moneysupermarket.com/savings/ , [May 5, 2009] 8. Haurant S., Desperately seeking a sensible savings rate, 2009, [Online] Available: http://www.guardian.co.uk/money/2009/mar/04/savings-best-interest-rates, [May 5, 2009] 9. Gold Price 2009 - Friday 19th December 2008, n.d., [Online] Available: http://goldnews.bullionvault.com/gold_price_2009 , [May 5, 2009] Read More