Question

Harry and Meghan are in their early forties. They come to you seeking advice after the receipt of a lump sum inheritance from Harry’s dad of $180,000 and they wish to invest the funds. He wants to invest the funds outside of superannuation in order to have access to the liquidity if required. With the additional funds he prepared to take on more risk in order to try and generate a higher return. He would like to use $60,000 to build a swimming pool in around 4 years.

Their situation is as follows:

Harry earns $120,000 per year and Meghan works part time earning $52,000. They have disposable income of $10,000 per year after all expenses. The couple has two children under 16. Meghan is pregnant. They have no debts and their existing assets include cash of $40,000 held in their joint bank account and $55,000 in a term deposit. Harry has $110,000 in Super and Meghan has $130,000 both in the conservative option of their super fund.

Address the following questions.

(A) What would be the benefit of investing the inheritance in a portfolio of investments that are professional managed by SCU graduates such as managed funds, ETF, Listed Investment companies etc as opposed to Harry and Meghan Managing the money?

(B) Given their risk profile of a balanced investor, how would you construct a portfolio for Harry and Meghan and discuss how you would allocate funds across various asset classes.

(C) What issues would you consider in determining which particular managed funds would be appropriate to invest in. They advise that they do not need any further income.

(D) How would you explain any risks they face.

(E)   How would an investment in managed funds affect their tax position and should funds be invested in any particular persons name, or entity in order to minimise tax ? Explain.

(F) If they wished to invest in Ethical Investments, which characteristics are typically associated with ethical investments.

Answer 1

A.

Before understanding about the benefits of investing in a professionally managed portfolio of investments, one must know about the meaning of 'INVESTMENT PORTFOLIO'.

Investment Portfolio refers to the collection of all the financial instruments in which the investor has invested his/her funds, it includes stocks, bonds, debentures, mutual fund investments and so on.

There could be various advantages of investing the inheritance into the portfolio of investments that will be managed by the experts as opposed to the way it is being managed by Harry and Meghan, and those benefits are as follows:

1) Harry and Meghan are not the professional investors and therefore, have no expertise in the field. They just have some future plans and want to invest their funds in those financial instruments which can give them access to the liquidity and they are also ready to take additional risk.

Experts/SCU Graduates will understand these financial goals of Harry and Meghan and will accordingly invest their funds into various financial instruments. And, in this way they both will be relieved of taking important decision regarding the investment of funds into a right financial instrument.

2) Investment decisions made by an expert in his/her field are always considered better than those taken by an inexperienced person.

3) Financial Market involves risk and that's why investment decisions need to be taken very carefully, only after a complete and an in depth analysis of various technical and fundamental factors which can have impact on the future returns. And, SCU graduates will certainly take any investment decision after doing complete funadamental and technical analysis, which would not be possible to do by Harry and Meghan.

4) And, the biggest advantage of taking the services of Investment Portfolio Managers is that they help people in diversifying the finacial risk by not limiting their funds into the finacial assets of only one or two companies.

SCU Graduates firstly undesrstand the financial goals of people i.e, their risk taking capabilities and liquidity requirements and after that they take investment decision of investing the client's funds into the various finnacial assets of different companies.