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DQ Case Solution

question.1)

Introduction

The Junior Associate of the First Global Bank has been planning to invest for her retirement however,she does not have enough knowledge and therefore, she has asked for suggestion for investing. She currently has £5,000/- which she wishes to invest for her retirement. Below are some of the theories that an investor should know before investing in any kind of security;

Benefits of saving early for Retirement

The following are the benefits of saving early;

• If people start to save early, then their money will have more time to grow and after their retirement, they will be able to live more happily and relaxed.
• If people invest early then they have the option to retire earlier as they would have saved an appropriate amount and would not have to work in late ages to support there after retirement life.
• Investing early helps investors more due to the effect of compounding of interest which allows investment to grow at a faster rate; Defined below is the concept of Compounding;

Compound Interest:

Compound Interest can be defined as the process of interest being added to principal and then earn interest on interest. For e.g. a person invests $1,000 in a bank having annual compound interest rate of 10%, therefore after 2 years, the investor would beable to earn $100 on the principal and another $10 on the interest which was accrued in year 1.

Risk and return relationship

Investors receive returns on investments.Investors make these investments which represents the risk taken by them for trusting someone else with his money. The risk that investors take results in returns that are provided to the investor. Therefore, it can be said that as investors take more risk, then they also expect higher return to compensate for the risk taken. Risks can be defined as the variability of actual return that an investor receives against the return that was expected from the investment.
The return that an investor should expect from investment that is risky can be calculated by using the capital asset pricing model. Therefore, the equation for return is;
Expected return for investor = Return from a risk-free investment + Systematic Risk Premium
The capital asset pricing model shows that an investor will expect return above the risk free rate as they have taken risks and need to be compensated for that. The compensation that an investor will receive above risk free rate equals the systematic risk premium, which is equal to the multiple of market premium offered by the market as a whole and the systematic risk that the investment as compared to the market risks.

Available Options:

Invest in Mutual Fund only

Mutual funds are organizations that manage funds of other people/ investors; they may invest these funds in any market depending on their strategies. The mutual funds are managed by experienced managers who have expert knowledge of investing and have years of experience to back it.

Following are benefits and Costs of investing in mutual funds;

• Diversification

The good thing about investing in mutual funds is that they allow investors to invest in a diversified portfolio. The reason for investing in a diversified portfolio is because it maximizes the expected returns while reducing the risk.

• Liquidity

Liquidity means the ability to convert one's assets to cash with relative ease. Mutual funds are considered liquid assets as there is always high demand for many of the funds in the marketplace. Therefore, an investor can easily exchange the asset to cash by selling it to another investor.

• Professional Management

Mutual funds do not need investors to have a great deal of time or knowledge because they are controlled by professional fund managers. This helps an inexperienced investor who is looking to maximize his financial goals........................

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