1

Finance and Accounting

2

Table of Contents

Table of Contents..............................................2

Part A.........................................................3

Investment.....................................................3

Investment objective...........................................3

Portfolio......................................................4

Various types of investment options............................4

Best option: Property investment...............................9

Use of property as investment option by private individuals. . .11

Advantages and disadvantages of investment in property compared

with other asset classes......................................13

Part B........................................................15

Bibliography..................................................15

Reference List................................................17

3

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

highlights the importance of hard earned money of an individual.

Investment basically refers to employment of funds for receiving

a good return from it. Generally, the term investment defines the

use of appropriate use of heard earned money to receive a

handsome return after a specific period of time. Investment of

funds is encouraged by every individual from past decades. The

investments take place through the purchase of financial products

or other items too. For individuals, it is important to evaluate

a particular investment before investing lump sum money as the

financial market is very risky and the investors can encounter

huge loss. The money invested is saved from present consumption

and thus benefits are expected by the investors. Hence, return on

investment can be coined as the reward for the long wait for

money. The savings are investing in a number of options after

evaluating the risk and return trade off. As the risk return

4

trade off increases the benefits also increases. However, if the

investment is very risky then rewards are relatively low or can

even fetch loss (UNEP, 2011).

Investment objective

Before investing in a particular asset, it is important for an

investor to analyze the options. 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 have created fortune of many during the course of

life. The initial step towards investment process is to ascertain

the features of various options and then match them with the

preference of individual.

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 incorporates the security and

social status. Moreover the objectives can also be classified

into personal or financial objectives. The financial objectives

refer to profitability, safety and liquidity. Individual or

5

personal objectives are pertains to personal features of

individuals like as status, family commitments, educational

requirements, dependents, consumption, income and provision for

retirement (BNP Paribus Real Estate, 2013).

Portfolio

Here, portfolio is defined as the combined holding for various

kinds of 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 also aims at

increasing the return. The calculation of risk-return feature of

a portfolio is composed over time and modifications are made in

accordance with the combination of other securities.

6

Various types of investment options

There is wide range of options for investment that are available

globally. The investors have the responsibility to select the best

option from a list of options after critically evaluating each one

of it. The following options are available to the investors for

investment:

Mutual Fund

It is defined as an investment trust which aims at collecting

fund from a number of investors who have definite financial

objective. The accumulated funds are invested in capital markets

instruments like debentures, shares and other securities. The

capital market investments are basically associated with risk

because its performance id dependent on a number of market

factors. The profit earned from the investments is shared among

the investors. For a layman in investment, it is a risky concept

as the performance of financial market fluctuates with the

economic and political condition of a country. However, if the

market condition is suitable for the investors they earn adequate

profit from their investment (U.S. Securities and Exchange

Commission, n.d.). It offers liquidity and diversity at a lower

7

cost along with assistance from professionals of the capital

market. Investors buy the shares that are invested as the mutual

fund instead of directly investing in the secondary market such

as London Stock Exchange or Nasdaq Stock Market. The price of

mutual fund is the per share net asset value (NAV) along with the

fees of shareholders. It is invested for a specific time frame

which is ascertained at the time of investment. One of the

interesting features of mutual fund is that it is redeemable

which means the investors can sell the shares at any point of

time before the date of expiry. Mutual fund sells the shares at a

continuous basis. The investment portfolios are dealt by separate

entities, they are known as investment advisers. These advisers

have registration with Security Exchange Commission (SEC).

The main advantages of mutual fund are as follows:

Professional management: The mutual fund investments are managed

by professionals who have huge knowledge regarding the capital

market. These professionals in behalf of the investors monitor

the performance of the shares that are used for investing in

mutual find. The investors do not have to worry about their

investment, rather they depend on the advices of these

8

professionals and make the decision of purchase and redeem (U.S.

Securities and Exchange Commission, n.d.).

Affordability: The investors who do not possess lump sum amount

to invest in capital market, mutual fund is the only source of

investment where even these investors can invest small amount at

a particular interval of time (U.S. Securities and Exchange

Commission, n.d.; Porter, 2011).

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 to a

number of sectors in a particular industry then the chance of

getting higher return increases as the risk is lowered. Hence,

mutual fund is an easier way for achieving diversification and

getting higher return.

Liquidity: The liquidity of mutual fund is higher in a way that

the investors can redeem their shares at any point of time even

before expiry at the present NAV value. However, there is a small

deduction in the amount which is regarded as penalty (U.S.

Securities and Exchange Commission, n.d.).

9

Apart from the above mentioned advantages, there are few

disadvantages of the investment too:

Negative returns: Investors have to pay annual fees and sales

charges along with other charges at the beginning of investment

period, no matter how the mutual fund performs. These charges are

mandatory regardless of performance and profit earned by the

mutual fund. The investor has to pay taxes on capital gains which

are based on the time of investment. The payment of taxes do not

depend on the performance of the mutual fund in the capital

market, Even if the market performs poorly, the investors have to

pay the taxes on their full investment.

Price uncertainty: The real time price of stocks is obtained from

the websites of the company or from the broker and thus in this

case, the price can be ascertained or predicted. The changes in

stock price movement can be traced hourly. However, in case of

mutual fund, the price is dependent on the purchased or

redeemable shares’ NAV. Thus, the price cannot be ascertained

until it is calculated after the placement of hours. The

businesses should calculate their NAV once a day after the

10

closure of the exchange so as to inform the performance of the

mutual fund (U.S. Securities and Exchange Commission, n.d.).

Lack of control: The investors do not have the power to influence

the performance of mutual fund as it is dependent on the analysis

of the fund managers who are basically defined as the

professional mangers in the asset management companies (U.S.

Securities and Exchange Commission, n.d.).

Investment in stock market

Stock market is defined is one of the most risky option for

investment. The risk associated with the stock market provides

the investors with higher return if the performance of the

capital market is excellent. The stock market justifies the fact

high return is associated with high risk. If the market performs

well, the investors get higher return even after investing in

riskier assets. Many factors affect the stock price fluctuations

and for this reason the future stock prices cannot be predicted.

The stock market operation depends on probability. This

probability is evaluated based on the information that is

obtained from the historical data. It is very difficult to

11

evaluate the exact future price of stock; however, there are

50:50 chances that the prices will be exact (U.S. Securities and

Exchange Commission, 2014). Since there are many factors that

influence the performance of stock price, the prediction of is

based only on assumption and thus there is a chance that the

price may decrease in future. After considering the probability

of risk involved in stock market, one can invest their money very

carefully with any company. The share price movement of the

company should be studied very minutely and the investment

objective should be ascertained (Seitzinger, 2013).

The following are the advantages of investing in stock market:

High return: Stocks are regarded as risky assets. They do not

produce any guaranteed return; sometimes it gives higher and

lower returns. Nevertheless, if the long term movement of the

stock market 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. According to the research carried

by Reserve Bank, the stock market has encountered growth by more

than 10% over the past few decades. During the same phase, the

government bond market grew only 5% (U.S. Securities and Exchange

12

Commission, 2014). Thus it can be stated that the stock market is

more profitable than the bond market globally.

Delay in Tax payment: Investment in stocks is accompanied with

delay of tax payment and thus stocks are preferred by investors

over all investments. When a particular stock earns huge return,

the investor does not have to file a return on the earnings

(Tester, 2010). The stocks gains are reported when the shares are

sold for earning more profit (U.S. Securities and Exchange

Commission, 2014).

Liquidity: Stick market is regarded as the huge auction house.

The investors are selling and buying the shares on a daily basis.

This has made stock investment liquid as when the investor want

to sell the share it is very easy and quick (Pivo, 2008).

Apart from the above mentioned advantages there are disadvantages

too which are as follows:

Volatile investment: The main disadvantage of investing in stock

market is that it is a volatile investment. The price of the

stock fluctuates a lot depending on the condition of the market.

Last one to get the profit: As shareholders of a company,

investors are partial owners but they are the last one to receive

13

the profit. The profit is firstly distributed to the employees,

creditors, suppliers and reserved for maintaining the

infrastructure ((Bebbigton, 2001, Edwards, 2008; Bebbigton, 2001,

Narayananswamy, 2008; Milad, 2009; Hoofman, 2009; Henry, C. and

Piekarski, 2005).

Not allowed in internal operation of company: It is obvious that

the investors are partial owners of the invested company but they

cannot get into its internal operation. As a result, they are not

able to know whether the company is providing them the right

information regarding their performance. This performance is very

crucial for the investors as it reflects the earnings of the

company (U.S. Securities and Exchange Commission, 2014; Cooper,

2000).

Apart from the above mentioned investments there is also another

option for investing money. This option is the best of all and is

elaborated in the next subheadings.

Best option: Property investment

Investment in property is profitable just like any other

investment option. However, the process of earning profit is

14

quite different as it is associated with the resale of the

property and then only the profit is obtained. 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 property. Properties are always regarded as the

best investment plan as it is safe since it is less volatile in

nature. In general the 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 and it can provide steady income when the same are

given on rent (Isaac and O'Leary, 2011).

Tax benefits

Tax benefits are also associated with the negative gearing. It

actually refers to the 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 that is paid

by the investor on loan and above all it is attached with

deduction of costs associated with maintenance of property. In a

situation where the interest rate is low, the investment in

properties is positively geared. Thus, it is dependent on the

15

present interest rates that are paid as the investment to the

home loans (UNEP, 2012; Albrecht, 2011; Warren, 2009).

The reason behind establishing property portfolio is to earn

profit and move towards the financial independence. Financial

independence means different to separate individuals. For an

investor of property, financial independence means owning three

properties by the time of retirement.

Another reason for choosing property investment as the best

option is that it manufactures the value for the investors. The

investors, who invest in different types of assets such as

managed funds, deposits and shares indirect property plays a

comparatively inactive role during the decision making of

investment process. However, the direct property investors are

wholly responsible for the success or failure of the deal (UNEP,

2012).

There are various strategies which can be employed to earn money

out of property and only two ways to earn profit. The first

income is collected by providing the house on rental and the

second one is from the capital growth with the passage of time

(UNEP, 2011).

16

In the first option or rental income, the money directly comes

into the pocket. However, if the rental income of a property

exceeds the cost 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

encounters increase in value faster than inflation then the home

is bought at a better price which gives higher profit. When an

individual borrows money to buy property, the increase in value

of the same is beneficial as he/she can sell the property at that

increased price (Banerjee, 2010).

Use of property as investment option by private individuals

This section of the assignment highlights the importance of

investment in property. The global real estate market has

experienced huge fluctuations from past few decades. During the

financial crisis the world experienced increase in house price

which resulted in more borrowing of money. Since then the real

estate market is encountering recovery very cautiously. However,

17

the recreation of this sector is helping the fund manager to

raise capital in form of funds from the sale of property. The

economic downturn has crippled the investor’s purchasing power to

a great extent as the housing price increased. The demand for

property has not decreased with the increase 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. Thus, it is very crucial for an individual to

evaluate the benefits before investing in property (Paul and

Gray, 2002). The long term goals for investing in property are

examined so as to understand whether the property investment is

at all advantageous or not. Individuals plan for their future

prosperity as they are worried regarding the advancement of

generation and inflation which is affecting their daily life. The

disposable income is decreasing due to the financial condition of

economy and the rise in price of commodities is making the

situation worse. In such a situation, an individual have to think

regarding savings and investment which will provide them with

security for their future (Hargitay and Yu, 2003).

18

Before deciding for investing in property, a particular portfolio

should be build in order to plan for right investment. Few people

have tendency to invest in property without thinking whether it

will a good deal or not. They even do not have definite goal in

their mind which will 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 it changes with the economy. Property investment is

basically a long tern venture which can minimise the risk of

losing money and capitalise upon the strength of the same

(Elmaleh, 2005; Harrison, 2008, Ingram, 2007; Francis, 2010;

Kimuda, 2008).

The needs for using property investment vary from person to

person. Some people like to invest in properties with an aim of

receiving debt free and secure income after retirement. It means

that a wise investor can make investments in properties and can

take decision of retirement within few years as this investment

assures him/her reliable rental income, which is inflation free.

19

The plans for different investor are different as their

requirements are different and as a result the global property

market has encountered huge changes. The modifications take place

because of the specialised needs of the individual investors and

thus the services are designed accordingly. The level of risk for

the individual investment projects are evaluated with respect to

the tenure of the investments (Kapferer, 2012).

To build a balanced portfolio, property is classified into two

categories: generators and accelerators.

Generators

The income generating property is related to rental income; if

rental income increases then the value of the property goes up

and the ratio is called yield percentage. The traditional shops

and offices are valued in this particular way. However, semi-

commercial property like student accommodation is valued based on

the yield. The income generators aims at providing secure and

hassle free income after retirement and as a result a reliable

yield with minimal involvement are main reasons for purchasing

this products/ properties. In this property deals, resale is not

a significant factor as the income generators purchase the

20

properties for long run and for delivering inflating income. The

income generators include industrial and commercial units and

hotels. These are purchased on unitised basis. The main aim for

the income generators is to generate adequate yield for servicing

a mortgage, pay other costs and pay tax as well as pay back the

debt on the property, which they has taken over a period of time

(Grant, 2001).

Accelerators

It is observed that the residential properties in UK usually have

higher rates of capital growth but gains lower yields than

commercial property. The residential properties in few popular

locations produce excellent returns on the invested capital over

a long period of time. During increase in interest rates for

borrowing, the investors basically struggle for achieving the

overall cost of the property. Presently, the scenario in the

investment market in The United States is different because of

the reduced prices and escalating rents. This enables the

investors to achieve higher rental yields. However, the situation

is just the reverse in the United Kingdom (UK). People in UK buy

traditional residential properties in order to achieve potential

21

gain in long run while the rental income covers up the payment of

mortgages and maintenance cost. The emerging markets around the

world offer investors the possibility for achieving higher

capital growth as with every speculative investment there is a

chance of earning higher profit based on the demand and market

condition.

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 it is purchased to earn profit. It

is totally the possession of an individual and he/she can utilise

the benefits when required. However, it can be observed that

mutual fund or stock are also chosen by an individual and is

owned by the same but the only difference is that these are

managed and controlled by a different person and not by the

individual. Another advantage of property investments over other

is that it has potential appreciation for the highly leveraged

assets. Here, leverage means that an individual invest very small

amount of self owned money and borrow the rest for investing in

22

property. Now, with the passage of time the value of the property

increases but the debt remains the same and thus it is beneficial

to invest in property. 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 go up over time with the increase in land value

but can never decrease. Moreover, the rental property is owned by

the private individual and he/she can sell it any time when the

housing price increases. Thus, the above mentioned reasons are

enough for portraying the advantages of investments in property

over other investments.

The main disadvantage of property investments is capital

requirement. This investment requires a lot of capital base or

initial outlay. This factor is the main challenge for the

investors. The only way through which the cash can be arranged

for the investment is borrowing money from bank or any other

institutions. It is observed that purchasing a property is easy

but sometimes it is hard to find profitable investments. When the

economy is encountering a turmoil it is difficult for an

individual to invest in property due to shortage of initial

23

outlay. In such a situation, the lenders deny to give loan to the

investors. Investment in property is associated with risk as it

involves a lot of money.

24

Part B

Bibliography

Article 1: Sri Lanka Property Investment Guide

The article “Sri Lanka Property Investment Guide” highlights the

major property legislations and operational requirements that are

important for any property investment in Sri Lanka. The article

highlights the two type of property tenure i.e. leasehold and

freehold and its importance to the readers. The operational

requirements elaborate the necessities of the property investment

that are prevalent in Sri Lanka. The article is important for the

readers as it depicts the process undertaken to invest in a

particular property in Sri Lanka. It is vital to know the

legislation of the country before investing in its property as it

may lead to various issues of the rules are not followed (Jones

Lang LasSalle, 2013).

Article 2: Investing in Italian Real Estate

The article “Investing in Italian Real Estate” highlights the

investment requirements and patterns in Italy. It helps the

reader to get a clear picture regarding the Italian property

25

investment scenario. The article highlights whether property

investment in Italy is beneficial for the investors over other

investments. The documentation for the purchase of property are

very vital during property exchange, thus the article highlights

the different aspects of documentation and ownership. The tax

obligations that are prevalent in Italian property investment are

depicted in the article. It helps the reader to get a clear view

of the Italian property market (Consolato Generale D’Italia,

n.d.)

Article 3: Property Investment Strategies

The article “Property Investment Strategies” highlights the

different investment strategies that are available in the market.

However, it gives emphasis on property investment and elaborates

its advantages and disadvantages to the reader. It describes the

types of property available in the market and then highlights

their importance and advantages to the investors. The article

helps the reader to get clear idea pertaining to the number of

property investment strategies and choosing the best one

(HallMarkRealty, 2013). The benefits of investment in property

26

are also elaborated through case studies in these articles. It

helps the reader to understand the property market more lucidly.

27

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