The Investment Portfolio of an Individual - Term Paper Example

Finance and Accounting Table of Contents Part A 3 Investment 3 Investment objective 3 Portfolio 4 Various types of investment options in United Kingdom (UK) 4 Best option: Property investment 9 Use of property as investment option by private individuals 10 Advantages and disadvantages of investment in property compared with other asset classes 11 Part B 13 Bibliography 13 Reference List 15 Part A Investment “It’s your money and you have got several options to invest in” (UNEP, 2011). This quote is justifiable in a sense that it foregrounds the importance of hard earned money by an individual. Investment basically refers to the employment of funds for receiving a good return from the same. Generally, the term, investment, refers to appropriate use of hard earned money in order to receive a handsome return after a specific period of time. Investment of funds is encouraged by every individual since past decades. The investments also take place through the purchase of financial products or other items. Individuals should evaluate a particular investment before investing lump sum of money, given that the financial market is very risky and the investors can encounter huge loss. The money invested is saved from present consumption and thus, investors look forward to the benefits accrued. Hence, return on investment can be coined as the reward for the long wait for money. The savings are invested in a number of options after evaluating the risk and return trade off. The risk return trade off and the benefits increase simultaneously. However, in case the investment is very risky, rewards are relatively low or absent (UNEP, 2011). Investment objective Before investing in a particular asset, it is important for an investor to analyze the options available. Analysis of investments helps the investor to develop an appropriate portfolio, which provides maximum returns by minimizing the risk. It is a wide spread phenomena, which has created fortunes for several individuals. The initial step towards the investment process is to ascertain the features of various options available and subsequently relate them with the preference of individuals. The investment portfolio of an individual is designed for achieving certain objectives. The objectives are either tangible or intangible. The tangible objectives include purchase of cars and house and intangible objectives include the security and social status. Moreover, the objectives can also be classified into personal or financial ones. The financial objectives refer to profitability, safety and liquidity. Individual or personal objectives pertain to personal features of the individuals such as, status, family commitments, educational requirements, dependents, consumption, income and provision for retirement. Portfolio Portfolio is defined as the combined holding for various financial securities such as, debentures, government bonds, shares and other financial assets. Investment portfolios are not exactly a collection of unrelated assets. However, it is a careful blend of combined assets, which is formed within a unified framework. It is critical for the investors to take appropriate wealth decision before investing in any portfolio, which has low risk and return trade off. The objective of the portfolio is to reduce risk by diversifying it and increase the return associated. The calculation of risk-return feature of a portfolio is done over time and modifications are made in accordance with the combination of other securities. Various types of investment options in United Kingdom (UK) There is wide range of options for investment that are available in UK. The investors have the responsibility to select the best option from a list, after critically evaluating each of them. Few of the most important options are detailed below: UCTIS (Undertakings for the Collective Investment of Transferable Securities) funds These types are funds are coordinated by the public limited companies and are mainly available in the European Union. The funds are marketed worldwide but it is generally invested in European Union. The fund managers and funds are registered within domestic country. The regulation for individual countries is different and thus the disclosures are nit similar. It can be structured as the open ended funds and it gives the investors the right to repurchase the shares from the companies. The fund policies are not amended until Czech National bank approves the amendments. The investment strategists of these funds cannot be altered (JP Morgan Asset Managment, 2013). Advantages and disadvantages of UCTIS funds The main advantages are as follows: High return: UCTIS are regarded as risky assets. They do not produce any guaranteed return and can provide with higher or lower returns. Even so, if long-term movement of the fund is observed, then it can be said that it has encountered an upward trend. When the investment period is long, the return is also very high. Delay in Tax payment: Investment in these funds are accompanied with a delay of tax payment, which is why this funds are preferred by investors over all investments available. When a particular fund earns huge return, the investor does not have to file a return on the earnings. The fund gains are reported when the shares are sold for earning more profit. Professional management: The UCTIS funds are managed by professionals who have adequate knowledge regarding the share market as these funds are invested in company shares. These professionals in behalf of the investors monitor performance of the shares that are used for investing in mutual find. The investors need not worry about their investment. They can depend on advices given by these professionals and accordingly make the decision of purchase and redeem (JP Morgan Asset Managment, 2013; Pivo, 2008) Affordability: Investors often lack lump sum amounts to invest in capital market. So, UCTIS fund is the only source of investment where even these investors can invest small amount at a particular interval of time (JP Morgan Asset Managment, 2013). Diversification: Diversification is defined as the investing strategy that helps in allocating a particular amount in different baskets of risk. When the risk is distributed over a number of sectors in a particular industry, then the chance of getting higher return increases as the risk is lowered. Hence, UCTIS funds are easier way for achieving diversification and obtaining higher return (JP Morgan Asset Managment, 2013; Bebbigton, 2001). Apart from the above mentioned advantages, there are certain disadvantages entailed that are mentioned below: Volatile investment: The main disadvantage of investing in this fund is that it is a volatile investment. The price of the funds greatly fluctuates depending on the market conditions (Edwards, 2008). Not allowed in internal operation of company: Although the investors are partial owners of an invested company, they cannot be involved in its internal operation. As a result, they are not able to realize whether the company is providing them with the right information regarding its performance. This information is very crucial for the investors as it reflects the company’s earnings. Price uncertainty: The real time price of stocks is obtained from the company websites or the broker and as a result, the price can be ascertained or predicted. The changes in stock price movement can be traced hourly. However, in case of UCTIS funds the process is dependent on share price movements of the companies. Hence, the price cannot be determined until it is calculated after the placement of orders (JP Morgan Asset Managment, 2013). Lack of control: The investors do not have the power to influence the performance of UCTIS fund as it is dependent on analysis made by the fund managers who are regarded as the professional managers in the asset management companies (JP Morgan Asset Managment, 2013). OEICS (Open ended Investment Compnaies) funds Open Ended Investment Companies (or OEICs) invests in the stock market through the funds that are preferred by the investors. When an investor invests in OEIC funds the invested amounts are pooled with other investors. This indicates that it can be spread wide across a number of investments such as fixed interest securities or equities so that the risks are diversified in different sectors. OEIC funds give opportunity to investor for earning more and are designed for medium to long term investment (Scottish Window, 2014; Narayananswamy, 2008). The main advantages and disadvantages are as follows: Advantages and disadvantages The advantages are as follows: Penalty: The liquidity of OEIC funds is higher in a way that the investors can redeem their shares at any point of time. Nevertheless, there is a small deduction in the amount, which is regarded as penalty (Scottish Window, 2014). The disadvantages are as follows: Negative returns: Investors have to pay annual fees and sales charges along with other charges at the beginning of the investment period, regardless of performance and profit of the mutual fund. The investor has to pay taxes on capital gains, which are based on the time of investment. The payment of taxes does not depend on performance of the mutual fund in the capital market. Tax treatment of OEIC Authorised Investment Funds (Tax) Regulations 2006 established the tax treatment of OEICs on 1st April, 2006. The investments are regulated by periodic modifications that are made in Tax Acts and TCGA 1992. Particularly, regulation 98 highlighted that TCGA 1992 is applied to holdings and assets of OEICs. It is also enforced on the transactions of OEICs. The rights associated with the assets are subject to trusts and the transactions are connected with the trusts. In wide term, this indicated that the profits earned by OEIC are not taxable under Corporation Tax and the shares invested in OEIC are treated in the same manner. The regulation indicated that the provisions in TCGA 1992 and Tax Acts are applicable to the companies. However, it is not applicable to the authorised unit trusts (HM Revenue and Customs, 2013). ETF (Exchange Traded Funds) ETFs are basically forms the basket of assets that are traded across stock exchange. These funds are subject to price changes throughout a particular day when it is brought or sold. When an investor owns an ETF, he/she gets the opportunity to diversify in an index fund. It has the ability to sell short and buy on margin (Wide Area, 2014; Finacle, 2013). Advantage and disadvantages The advantage of the fund is that expense ratios are lower than the average mutual fund. When the transactions of ETFs take place (buying and selling) the investor has to pay a commission to the broker and there is no regular payment. The disadvantage of the fund is that it cannot be reinvested as dividends (Finacle, 2013). Pension Funds This finds is established by the employers to organize and facilitate employees investment after their retirement. Pension fund is a set of asset that is pooled together to develop steady growth over short or long term. It provides pensions to the employees as they reach their end of working days and commence towards retirement. The pension funds are usually run by financial intermediary of company and employees, whilst few corporations’ operates their in-house pension funds. The pension funds are controls large capital and thus represent the institutional investors in various nations. Tax treatments of ETFs The tax treatment of ETF is separate in different countries. When the ETFs are issued in France or USA, the trader has to pay more tax on the respective investments than he/she could have paid if it is issued in United Kingdom. In the UK, about 75% of ETFs are provided either through distributor or reporting status (Morningstar, 2014). However, the investors are very particular about classification of in these categories as these results in less tax. If the ETF have either of the two classifications, it denotes that ETF are subject to capital gains tax. This tax payment is much cheaper than the income tax payment. The capital gains tax rates is 18% or 28% whereas the income tax rates is 50%. It is vital to understand that about 25% of the ETFs in the UK do not possess distributor or reporting status. It is observed that is this status is not there, investment gains are treated as the income tax making the whole transaction expensive (Morningstar, 2014). Individual Savings Accounts (ISA) The Individual Savings Accounts (ISA) is regarded as a class of investment arrangements that are available for the residents of UK. It measures the favourable status of tax. The payments to the account are generated after tax income. The account is free from capital gains tax and income tax on returns on investment. There is no tax payment on the withdrawal of money from the scheme. A broad range of investments are held within arrangement and there are no restriction on the amount of money withdrawn. Best option: Property investment Similar to any other investment option, investment made in property is also profitable. Even so, the process of earning profit is quite different as it is associated with resale of the property. The usage of the property has a big impact on its value. The investors of properties have to conduct studies in order to determine the best and profitable one for investment. Properties are always considered as the best investment plan, given that they are safe owing to a less volatile nature. In general, a property maintains its values when other asset prices are declining. Properties have the opportunity to encounter capital growth, which means that its value increases over time, thereby providing with steady income when the same are given on rent (Isaac and OLeary, 2011). Tax benefits Tax benefits are also associated with the negative gearing. It actually refers to a situation when the cost of investment is more than the return. Negative gearing of property refers to the net rental income, which is lower than the interest paid by the investor on loan and above all, it is attached with deduction of costs related to maintenance of property. In a situation where the interest rate is low, the investment in properties is positively geared. Hence, positive gearing is dependent on the present interest rates that are paid as investment to the home loans (UNEP, 2012; Albrecht, 2011; IFRS, 2009). The reason behind establishing property portfolio is to earn profit and move towards financial independence. Financial independence has different meanings for separate individuals. For an investor of property, financial independence implies owning three properties by the time of retirement. Another reason for choosing property investment as the best option is that it manufactures value for the investors. The investors, who invest in different types of assets such as, managed funds, deposits and shares indirect property, play a comparatively inactive role during the decision making process related to investment. Then again, the direct property investors are wholly responsible for success or failure of the deal (UNEP, 2012). There are various strategies that can be employed in order to earn money out of property, even though only two ways are available to earn profit. The first income is collected by placing the house on rent and the second one arises from the capital growth with the passage of time (UNEP, 2011; Tax Cafe, 2014). In the first option or rental income, the money is directly added to the bank balance. However, if the rental income of a property exceeds its cost, then profit is earned. These properties are called cash flow positive. The cash flow positive properties have gross rental yields, which are above 7%. The second option or the capital growth relies on the increasing value of property (Anthony Ratcliffe to the Financial Mail, 2003). When a property experiences a rise in value faster than inflation, then it is bought at a better price that yields higher profit. When an individual borrows money to buy property, increase in value of the same is beneficial as he/she can sell the property at the increased price (Banerjee, 2010). Use of property as investment option by private individuals This section of the assignment highlights on the importance of investment in property. The global real estate market has experienced huge fluctuations since past few decades. During the financial crisis, the world had experienced increase in house prices, which resulted in greater amount of money borrowing. Since then, the real estate market is encountering recovery very cautiously. Nonetheless, revival of this sector is helping the fund managers so as to raise capital in form of funds from the sale of property. The economic downturn has crippled the investors’ purchasing power to a great extent as the housing price had increased. It was observed that the demand for property had not declined with the rise in housing price as individuals require accommodating their particular needs. The investors in property need to maximize their return while downsizing the potential risk that is related to the particular property sector. As a result, it is very crucial for an individual to evaluate the benefits before investing in a property (Paul and Gray, 2002). The long-term goals for investing in property are examined so as to realize whether the property investment is advantageous or not. Individuals plan for their future prosperity as they are worried over the advancement of generation and inflation, which affect their daily lives. The disposable income of individuals is falling due to the fluctuating financial economic condition and rising prices of commodities is worsening the situation. Under such circumstances, an individual have to consider savings and investment, which shall provide with security for their future (Hargitay and Yu, 2003; Milad, 2009; Hoofman, 2009; Henry and Piekarski, 2005). Before deciding to invest in property, a particular portfolio should be built in order to plan for the right investment. Certain people have a tendency to invest in property without assessing the worth of the same. They do not even form a definite goal in their mind, which would guide them towards future prosperity. However, they can receive quick and adequate return from the speculative investments if the market condition is good and risk free. Hence, it can be stated highly risky projects are also profitable for private individuals as the property market is dynamic and changes with the economic conditions. Property investment is basically a long-term venture that can minimise the risk of losing money and capitalise upon strength of the same (Elmaleh, 2005; Harrison, 2008, Ingram, 2007; Francis, 2010; Kimuda, 2008). The need for using property investment varies from one person to another. Some people prefer investing in properties with an underlying aim to receive debt free and secure income after retirement. Such a motive implies that a wise investor can make investments in properties and subsequently decide to retire within few years as the investment made assures him/her of reliable rental income that is inflation free. Different investors plan in dissimilar manners as per their requirements and consequently, the global property market has encountered huge changes. The modifications take place due to the specialised needs of individual investors and the services are designed accordingly. The level of risk entailed by individual investment projects are evaluated with respect to tenure of the same. REITS (Real Estate Investment Trust) These securities are sold like stock on major exchanges and are invested in the real estate directly. It is invested either throughout mortgages or via properties. REITs have tax benefits which gives the investors high yields. It also renders high liquid method for investing in real estate. The equity REITs are invested in owned properties by the investors. The revenues come directly from the rents of properties. Mortgage REIT are investments which invests in property mortgages. These funds have loan money for the mortgages for the owners of real estate or purchase the mortgage-backed securities of the existing mortgages. Its revenues are produced from the interest that is earned from the mortgage loans (The Guardian, 2013). Advantages and disadvantages of investment in property compared with other asset classes The main advantage behind investing in property is that it is wholly owned by the owner and is purchased to earn profit. It is entirely under possession of an individual and he/she can utilise the benefits when required. However, it can be observed that mutual fund or stock is also chosen by an individual and is owned by the same, but the sole difference lies in the fact that these are managed and controlled by a different person and not by the owner. Another advantage of property investment over other investments is that it has potential appreciation for the highly leveraged assets. Here, leverage means that an individual invests a very small amount of self-owned money and borrow the rest for investing in property. With the passage of time, value of the property increases, but the debt remains the same, which renders investing in property beneficial. The rental income that is received by an individual owner is more than any other return that can be achieved from an investment (Lützkendorf and Lorenz, 2005). The rental income can rise over time with increase in land value, but can never decrease. Moreover, a rental property is owned by the private individual who can sell when there is a hike in the housing prices. Thus, the above mentioned reasons effectively portray the advantages of investments in property in comparison to other investments (HM Treasury, 2013). The main disadvantage of property investments is capital requirement. Property investment requires huge capital base or initial outlay. This factor is the main challenge for investors. The only way through which the cash required can be arranged is that of borrowing money from a bank or any other institutions. It is observed that purchasing a property is easy, but it is often hard to procure profitable investments. When an economy encounters turmoil, making investments in property therein becomes difficult due to shortage of initial outlay. In such a situation, the lenders refuse to give loan to the investors. Investment in property is associated with high risk as it involves a great amount of money (The Money Advise Services, 2013). Part B Bibliography Article 1: Taxes and ETFs: A Guide for British Investors The article, “Taxes and ETFs: A Guide for British Investors”, the taxation policies that are levied on the ETF transactions. It provides the investor with the detailed information pertaining to taxation rules of ETF, which assists them in taking the right decision regarding investment. It is vital to consider the tax payments for the investors as they might face problem later. The guide clearly directs the investor for making the right decision for investment by choosing the right ETF. The taxation policies for different countries are separate. It is observed that in few countries investor has to pay huge burden of tax whereas in countries like UK the tax payment is lower than the mentioned countries. Article 2: Commercial Property Investment The article, “Commercial Property Investment”, highlights on the investment requirements for commercial property in the UK. It helps the reader to obtain a clear insight into the property investment scenario in the UK. The article explains whether or not commercial property investment in the UK is beneficial for the investors over other investments. The documentation for the purchase of property is very vital during property exchange, which is why the article foregrounds the different aspects of documentation and ownership. The tax obligations that are prevalent in UK commercial property investment are enumerated in the article. The reader is able to get a clear view of the UK property market (RICS, 2014). The article also foregrounds two types of property tenure, namely leasehold and freehold and their importance to the readers. The operational requirements elaborate on necessities of the property investments that are prevalent in UK. The article is important for the readers as it depicts the process undertaken in order to invest in a particular property in UK. It is vital to be aware of legislations of the country before investing in its property as various issues may arise if the rules are not followed. Article 3: Indirect Property Investments The article, “Indirect Property Investments”, highlights on different investment strategies that are available in the market. However, it emphasises on property investment and advantages and disadvantages associated. The article describes the types of property available in the market and subsequently elaborates on their importance and advantages to the investors. The article enables the reader to obtain a clear idea pertaining to the property investment strategies prevalent and selection of the suitable one (The Money Advise Services, 2013). The benefits of investment in property are also discussed through case studies in this article. The reader is able to comprehend the property market more lucidly. Reference List Albrecht, W., 2011. Financial accounting. Conencticut: South-Western Cengage Learning. Anthony Ratcliffe to the Financial Mail, 2003. The Case for Commercial Property Investment by the Private Investor. [pdf] Anthony Ratcliffe to the Financial Mail. Available at: [Accessed 17 July 2014]. Banerjee, B., 2010. Financial accounting. London: PHI Learning Private Limited. Bebbigton, J., 2001. Financial accounting. London: British Library Cataloguing-in- Publication Data. Cooper, L., 2000. Strategic marketing planning for radically new products. Journal of Marketing, 64(1), pp. 1-15. Edwards, J., 2008. Financial accounting. 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Available at: < http://www.merrifields.co.uk/documents/RICSGuide.pdf > [Accessed 17 July 2014]. Scottish Window, 2014. OECIS Overview. [online] Available at: < http://www.scottishwidows.co.uk/managedcontent/investments/open_ended_investment_companies/index.html > [Accessed 17 July 2014]. Tax Cafe, 2014. Property ISA. [online] Available at: < http://www.taxcafe.co.uk/resources/property_isa.html > [Accessed 17 July 2014]. The Guardian, 2013. Money Investments Are Property Funds An Investment Worth Building?. [online] Available at: < http://www.theguardian.com/money/2013/jun/22/property-funds-investment-risks-rewards > [Accessed 17 July 2014]. The Money Advise Services, 2013. Indirect Property Investments. [online] Available at: < https://www.moneyadviceservice.org.uk/en/articles/indirect-property-investments > [Accessed 17 July 2014]. UNEP, 2011. Implementing Responsible Property Investment Strategies. [pdf] UNEP. Available at: [Accessed 17 July 2014]. UNEP, 2012. 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