Week 5 Flashcards
what is investment
– “place” money for profitable purposes
– extend capital in exchange for perceived profits
– giving up present consumption in exchange for future benefits
– opposite to consumption!
key investment factors
Key investment factors: Risk return: return of investment Management Taxability Liquidity Yeild
factors that determine your risk appetite
- Current Scenario - Your age, financial dependents, assets and liabilities, sources of income, level of engagement (active or passive investor) and investible capital
- Past Experience - Knowledge about investment products, inclination to learn, nature and composition of the last held portfolio and its performance
- Future Outlook - Time horizon available to fulfill the investment objectives, liquidity requirements in the near future, importance of tax savings vis-a-vis return on investment
- Investment Attitude - Willingness towards risk taking, ability to withstand short-term notional losses in return for long-term high returns
Based on your responses, an experienced MF advisor can determine your risk appetite and classify you as a conservative, assertive or an aggressive investor (there could be as many as five to seven investor classifications suggesting different debt-equity allocations).
different type of risk profiles
- A conservative investor’s primary objective is to preserve the capital and receive regular income. They have a low tolerance for risk and hence a major chunk of their investment should be allocated to debt or money market mutual funds like income schemes, FMPs, etc.
- A moderately aggressive investor is the one who is willing to take controlled risk for moderate returns. Such investors are generally recommended a mix of balanced, income, and index schemes so that they can benefit from a balanced portfolio.
- Aggressive investors consider risk as an opportunity and leverage their experience and knowledge to take intelligent financial decisions. The major share of their investment, therefore, goes to growth and equity schemes.
For most investment schemes, risk and returns are directly proportional. It is important to create the right balance between the two based on your objectives and risk appetite.
difference between risk and uncertainty
Risk: We don’t know what is going to happen next, but we do know what the distribution looks like.
Uncertainty: We don’t know what is going to happen next, and we do not know what the possible distribution looks like.
explain liquidity
refers to the speed, cost, and ease of converting the investment into cash. Investment differs in liquidity.
Stocks and shares are highly liquid – you can sell them on any business day, for a small brokerage fees, and receive your money in a day or two. Savings can be withdrawn in cash on the spot from a bank and therefore are very liquid.
Real estate, however, is an illiquid investment. It is difficult to convert an investment in real estate to cash quickly. To convert a real estate investment to cash,
there are two choices:
(1) sell the property or
(2) borrow against the property.
Both of these take time, and also cost money, in the form of seller closing costs or borrower loan costs. Therefore, one should invest in real estate only after seeing that personal future liquidity needs have been met with other form of investment.
major investment classes
o Cash o Fixed interest o Unlisted assets o Bonds o Real-estate o Stocks
2 main types of investment
Debt - which involves the lending of funds
Equity- which involves ownership of investment
define property yield
passing income / market value or net income from tenants / sale price
define dividend yield
Dividend / share price
define commercial property yeild
net income – outgoings = return
pros of renting
o Cheaper
o Freedom of location
o Avoid tax stamp duity, property tax, council rates
o Lifestyle choices
cons of renting
o No level of certainty o Short interrupted tenancy o Rising rents may price you out of the market o High initial savings – up to 20% deposit o High transaction costs o High Costs - Maintenance costs, rates, o interest costs o No potential tax deductions o No return on money o Potential landlord/tenant issues o Potential lease/rental agreement o hassles
why buy
- Freedom to do what you want
- Avoid close living
- Acts as forced saving
- Gives you security
- Principal home not taxed
- Benefits of FHOG
- Owning a house can be a hedge against inflation
cons of buying
- High initial savings – up to 20% deposit
- High transaction costs
- High Costs - Maintenance costs, rates, interest costs
- No potential tax deductions
- No return on money
- Potential landlord/tenant issues
- Potential lease/rental agreement hassles
- Initial cost: stamp duty, conveyance costs, building inspection, mortgage fee
- • Running or yearly costs: Body corporate fee, maintenance, taxes, home and content insurance
- Interest costs on loan
- • Selling cost when decide to sell
