- Outline an Appropriate Set of Investments for the Client B...
Outline an Appropriate Set of Investments for the Client Being Described on the Attachment. Illustrate your essay with specific examples.
1. Development of Client Profile
In order to determine the risk appetite of the client and then
advising on the appropriate set of investments, it is important to
develop a profile of the client. While some of the information is
given in the brief, other necessary information is assumed. The
client profile is as follows:
- Fixed deposit / government securities / Bonds:
this investment will typically have with long-term lock-in period
of, say, 3-5 years or more, and thus is an illiquid investment.
This investment is regarded almost 100% safe, and thus would
protect the capital.
- Tax saving growth mutual funds with investment only in
blue chip companies: the selected mutual funds must have a
very good performance track record (at least 10 years) of good
performance. This investment also comes with a typical lock-in
period of about 3 years, and would hence be illiquid.
- Growth mutual fund in emerging / mid cap, high-risk
high return securities: this investment needs to be
watched and tracked regularly for timely exits and entries. This is
a liquid investment as there is no lock in, and hence would keep
30% of the total investible surplus (₤45,000) in liquid.
- Real estate / REIT: this investment has the
potential of generating very handsome returns, due to its
leveragability. Also, since real estate seldom depreciates, the
capital is also fairly secured. Additionally, the rentals earned
from the property pretty much take care of the mortgage
obligations. Therefore, this is a hands-off investment. However,
real estate is illiquid, can be expensive, difficult to find, and
can sometimes get difficult to manage sometimes. In order to
overcome the liquidity problem, REITs (Real Estate Investment
Funds) are a good alternative to physical real estate. Like a
mutual fund, REIT is a fund created with investments from many
investors, investing mostly in high value commercial properties,
for rental incomes and capital appreciation. REITs are publicly
listed entities. Alternatively, she can invest in REIT mutual
funds, although REIT mutual funds are more diversified, and may not
offer the same growth prospects. One of the good REIT mutual funds
is Fidelity Real Estate Mutual Fund.
The post retirement investment suggested is a conservative income
mutual fund, which invests only in the safest securities, such as
government securities mostly. Also, "regular income" nature of the
investment is critical.