The Financial Position and Future Financial Ambition - Case Study Example

Assessment Contents Assessment 1 Contents 2 Introduction 3 Summary of his current financial position and then his future financial ambition 3 Discussion of the range of financial products appropriate for Keith 4 How these products should be split in terms of proportion or amounts of Keith’s current funds and future savings 6 The practicalities of finding these products using information technology, the processes involved, associated costs etc. 7 What are the costs (annual, management, dealing costs, stamp duty, tax etc.) on the products you have recommended that he invest in? 8 How he will manage his portfolio in the future 9 Conclusions 10 References 11 Introduction The role of information technology has assumed an important role in the delivery and access of financial services. It has provided people with the scope of accessing financial services without the help of brokers, financial advisers, and dealers. The dependence of people on insurance companies, financial services personnel, and fund manager has decreased to a considerable extent with the advent of information technology with regard to financial services. If a person intends to check his/her bank balance or wants to make a cash withdrawal from his/her bank account may use the automated teller machine (ATM) instead of visiting a branch of his/her bank. People can also check their balance through the use of online banking and telephone banking. The financial sector is considered to include insurance companies, banks, investment trusts, finance houses, stock exchange, fund managers and so on. The main purpose of these organizations is to meet the needs of public sector, businesses, and individuals in an efficient manner. Organizations that are operating in the financial sector are collectively called as financial intermediaries or financial institutions. Summary of his current financial position and then his future financial ambition Keith is a person who is 35 years of age and he works in a Mining Consultancy firm where he earns £ 41800 per annum. He is employed in this firm for the past 12 years. He has invested some amount of money since the start of his job in companies such as Antofagasta, Rio Tinto, and Vedanta. He owns 2500 ordinary shares in the company Antofagasta, 1200 in Rio Tinto, and 12000 in Vedanta. The company that he has invested in are all considered as mining companies and so he must invest in companies belonging to other sectors. In this regard, he must invest in Information Technology (IT), pharmaceuticals, manufacturing, and in real estate companies in an attempt to diversify his risks when a specific sector does not perform well (Agresti, 2002, p. 51). His current financial position is not that bad as he lives quite comfortably off his salary. He saves £ 400 per month from his salary and has £ 8200 in his current account at the present moment. He also has £ 3000 in his easy access savings account. He wants to buy a larger, detached property in Edinburgh in around five to six years’ time. To achieve this particular purpose, he likes to invest his funds in a mix of financial products. He wants to invest his money in relatively safe funds and also in risky and adventurous funds to generate more returns. He is quite willing to take risks in an attempt to generate huge returns. He also wants to keep his current shareholdings and wants to invest some money directly in certain UK company shares. He intends that the current savings that he has of £ 400 per month must be invested in additional financial products in the future. In this regard, he wants that any income, dividends, and interest that are earned from his investments must be pulled together with the current savings of £ 400 per month to invest in additional financial products in future. Investment in financial products is considered as very important for him because it will help him in building a sound portfolio which has the potential of generating a high rate of return (Albrecht and Sack, 2001, pp. 17-23). The investments in financial products such as mutual funds can be of utmost importance for him because such investments are considered to have pound cost averaging. It is considered as a technical term relating to buying of shares of a particular company or fund in equal pound amounts at regular intervals. The idea is very simple in this regard. If an investor invests an equal amount at regular intervals of time, he will be able to purchase more shares when prices become cheaper and fewer when they become expensive. Discussion of the range of financial products appropriate for Keith Keith should invest largely in mutual funds in an attempt to generate higher returns. He should focus on balanced funds as they are considered to have equity as well as debt exposures. Such funds have an equity and debt exposure in a proportion of 25% and 75% respectively. He also should invest in pure equity funds as they are considered to be tax free. Keith should consider purchasing of debentures of companies as they provide a stable source of income and are considered to be risk free (Boer, 2000, pp. 313-317). He should take into account Unit trusts and OEICs which are considered as very popular investment funds. In this regard, a fund manager buys shares or bonds of companies that are listed on stock exchange on behalf of the fund. The fund is divided into units and this is what investors buy. These funds are considered as open ended funds. He should make investments in Cash Isas because such instruments are considered to be free of capital gains tax and income tax. He should also consider investing in investment trusts of organizations which offers an unmanaged and fixed portfolio with regard to bonds and stocks. The units of such investments are considered as redeemable and they provide dividend income and/or capital appreciation. He should allocate his investments as 20% in mutual funds, 20% in investment trusts and unit trusts, 30% in debentures of companies, and 30% in property investments (Burnett, 2003, pp. 129-134). Investments in property are also an important decision because it provides large capital appreciations. He saves £ 400 per month from his salary and has £ 8200 in his current account at the present moment. He also has £ 3000 in his easy access savings account. These should be invested in various financial products such as to generate a considerable sum of money in a time span of 5 to 6 years to facilitate the decision of investment in property. Investments in mutual funds can be considered as an important source of investments as it tends to grow money when invested for a longer time horizon. Such investments will generate required funds that will be used in purchase of property in 6 years’ duration. The range of financial products appropriate for Keith has been chosen based on his savings amount per month and his risk appetite for investing in moderately safe and the remaining in risky securities (Toten, 2006, p.28). The investments by Keith in other sectors than mining would help to diversify the risk of the investment in company shares. According to his long term ambitions, Keith would also choose to invest in real estate property with monthly repayments in the form of mortgage loan. The financial instruments also include mutual funds and investments in higher amounts to the pension scheme of his company where he works. How these products should be split in terms of proportion or amounts of Keith’s current funds and future savings The amount of funds available with Keith includes the monthly savings of £400 and the amount accrued in his savings and current account. Keith has planned to invest these funds in avenues like company shares that do not lie in the mining sector like the real estate, manufacturing, pharmacy, IT, etc. The other areas of investment of Keith includes the investment in a property, mutual fund and increasing contribution to the pension scheme of the comp-any in which he works. Adding the total funds accrued in the current and savings account of Keith, the total sum of money available for investment is £11200. The proportion of the investment in several investment avenues of Keith has been explained as follows: Sl. Investment Avenues Proportional split of Keiths funds 1 Shares and debentures 30% 2 Mutual Fund 30% 3 Property Investment 20% 4 Pension scheme 20% The proportional split of Keith’s current funds have been done in line with the aspirations of the future return expected by Keith and the appetite for risk that is acceptable to him. Keith would prefer to invest in moderately safer investment channels with some exposure to risky investments. Keith’s desire to purchase a property in Edinburgh, the prospects of earning three tine pension from the tax free investments in the pension scheme and the objectives of diversifying the risk exposure on the investment in the company shares have been taken into account while deciding on the financial plan and splitting the current funds available with Keith (Greenwood, 2002, p.17). The proportional split of the current funds with Keith has been done with the objective of fulfilment of the desired rate of return of Keith in future. Due to the moderate risk appetite of Keith, the shares and debentures have been recommended to occupy 30% of the current funds of Keith. The shares and debentures would provide cash inflows to Keith both on short term as well as long term perspective. The calculated risk would be undertaken so that Keith would be able to maximize the return in future. The investment in the mutual funds would be in the proportion of 30% of the total available funds with Keith. The mutual funds would contain securities being monitored by the fund managers who would work to optimise the returns to Keith in future. The investment in the property would be done with 20% of the funds available with Keith. These funds would be utilised for the purpose of down payment against the mortgage loan that would be taken by Keith. The valuation of the property is expected to increase in future that would enable Keith to realise higher return on the investment (Booker, 2006, p.35). The remaining 20% of the current funds available with Keith would be invested in the pension scheme of the company where he is employed. These are tax free investments and the higher allocation of funds in the pension scheme would enable Keith to realise three time pension at the time of retirement. The practicalities of finding these products using information technology, the processes involved, associated costs etc. The facilities of information technology could be used by Keith in order to investigate the financial products that have been recommended to him. The information available over the online channels like internet would help Keith to browse through the product features. The risks and possible returns of these products along with their past performance could be reviewed by Keith in order to take informed decision over choosing these products. In order to apply for the financial products and services chosen by him, Keith would be able to contact the financial service provider companies for accessing the products. The various costs and benefits of investment in these products and the formalities of processing the investment could be enquired from these companies with the help of information technology applications. What are the costs (annual, management, dealing costs, stamp duty, tax etc.) on the products you have recommended that he invest in? It is recommended that Keith has to take 80% of the total cost of land as loan from the bank. The costs associated with this loan are processing charges, stamp duty, interest charges. The processing charges mean the charges which the credit officers take due to processing the loan proposal. Keith has to make the give periodic statement of the stock and book debts to the bank to indicate its liquidity. Bank will take collateral while giving home loan and thus stamp duty costs will come into place. Keith is suggested to invest in Unit Trust Funds. There many fees and charges which are to be charged by the fund manager. These include recurring fees of trustees and fund manager, and other charges charged for providing the services so that they can ultimately reduce the return on investment of investors. The management fees include an annual fess which is charged by the fund manager for managing the fund. The charges applied usually ranges from 0.5% to 2% per annum on the basis of NAV value of fund. The trustee fee is the annual fee which is charged by the trustee for providing custodian services for safekeeping the fund’s assets. This fee ranges from 0.1 % to 0.15 % per annum of the NAV value of the fund. There are other miscellaneous fees which include fund administration and audit fees. There are recurrent fees which comprises of Total Expense Ratio (TER). These fee ranges from 1.0 % to 2.5% of the NAV value of fund (Monetary Authority of Singapore, 2014, p. 1). The Keith is advised to invest into Investment trusts. Here separate fees are charged on shares. Keith is advised to invest into shares of real estate, IT, pharmaceuticals and manufacturing. Here he has to face a number of costs like Transfer fees, Inactivity fees, and Minimum equity requirement fees and Account maintenance fees. How he will manage his portfolio in the future Keith needs to realize that if he wants to purchase a land with his available cash resources it will not be possible. Presently he has approximately £400 per month left over from his salary and £ 8,200 in his current account and £ 3,000 in his easy-access savings account. Total in his account he has £ 11,200 in his account. Thus he will not be able to buy land with this amount or even achieve the amount needed by investing this money into market. Thus it is advisable that he takes 80% of the land value as loan from bank and 20% of the remaining amount will come from the investment which he makes. Keith will invest part of his money into buying shares of other companies across diversified sectors like Pharmaceuticals, IT, Real Estate, and manufacturing. This will help Keith in arranging for a diversified portfolio where in case any stock of a particular sector falls, the other sector will help it grow. Keith needs to keep updated with the daily performance of stocks so that he can take a call by himself based on his strategy. He also needs to take into account historical performance so that he can judge the potential of the stock (Khalique, 2013, p.1). Keith should also invest into Unit Trust and Investment trust which is also a diversification strategy. Here he will invest a fixed sum of money for a particular period so that he can withdraw the money whenever he needs. Such kinds of instruments are liquid in nature and can easily be withdrawn. Keith should try to invest into such instruments whenever the markets are down because he will be able to buy more units at that time and his unit volume will rise (Blair, 2008, p. 8). Keith needs to invest in Cash Isas which are completely free of capital gains and income tax. Keith can transfer money held in a cash Isa into a stocks and shares Isa. Conclusions It can be concluded that Keith will take the opportunity of loan from the bank and will take the path to give periodic statement of the stocks. Keith will also book debts with the aim to indicate the liquidity. On the other hand the bank will move on its path to take collaterals while approving the home loan as well as the stamp duty costs will take its own path. It can be concluded that Keith will invest in the Unit Trust Funds which will include trustees’ fees and some other changes which will ultimately reduce the return on investment. References Agresti, A., 2002. Categorical Data Analysis. New Jersey: John Wiley & Sons. Albrecht, S. and Sack, R., 2001. The Perilous Future of Accounting Education. CPA Journal, Vol. 71(3), pp. 17-23. Blair, A. 2008. Costs and charges in unit trusts. Available at: http://www.thersa.org/__data/assets/pdf_file/0006/155292/RSA-Alaister-Blair.pdf. [Accessed on: 17 March, 2014] Boer, G., 2000. Management Accounting Education: Yesterday, Today and Tomorrow. Issues in Accounting Education, Vol. 15(2), pp. 313-317. Booker, J. 2006. Financial Planning Fundamentals. Toronto: CCH Canadian Limited. Burnett, B., 2003. The Future of Accounting Education: A Regional Perspective. Journal of Education for Business, Vol. 78(3), pp. 129-134. Greenwood, R. P. 2002. Handbook of Financial Planning and Control. London: Gower Publishing Ltd. Khalique, F. 2013. Leeds puts municipal bonds on the UK map. Available at: http://www.efinancialnews.com/story/2013-07-03/leeds-puts-municipal-bonds-on-the-uk-map?ea9c8a2de0ee111045601ab04d673622. [Accessed on 17 March, 2014] Monetary Authority of Singapore. 2014. What are the fees and charges? What is the Total Expense Ratio (TER)? Available at: http://www.moneysense.gov.sg/understanding-financial-products/investments/types-of-investments/unit-trusts.aspx#. [Accessed on 17 March, 2014] Toten, M. 2006. Financial Planning. Melbourne: Career FAQs. Read More