Question

Ali family monthly income was RM6000, it includes salary, rental received. The amount of current saving is around RM500,000. He like to invest in investment and Ali family are risk taker, even they put a lot of money to invest one security if they really confident on that return. Ali family are focus on money saving, they do not eat or buy something expensive but they would like to buy securities. Short term commitments are investing to buy share or bond to get higher return and invest on their child’s education. Long term commitments are focus on less risk investment such as mutual fund and plan of retirement investment.

Discuss and identify the primary portfolio objective and the secondary objective for Ali family in the above condition (150words)

Explain how would Ali incorporate diversification concept in Ali family investment? Is international diversification advisable?

Answer 1

Before proceeding, we must understand the meaning of Portfolio, Portfolio Management, Types of Portfolio management and Objectives of Portfolio Management.

What is a Portfolio?

A portfolio stands for the collection of investments made by a person depending upon his income, budget and time. A person can choose to invest into various options like, Shares, bonds, Mutual funds, cash and so on which depends on the income he is earning, his budget (which he allocates in investments), time period for which he wants to invest.

What is Portfolio Management?

The Portfolio Management is the art of investing one’s funds in such a way that one can achieve the objective of growth of his investments by reducing the risk associated with it.

Portfolio Management is selection of securities in such a way so as to optimize the returns and minimizing the risks attached to the investment.

Types of Portfolio Management

• Active Portfolio Management
• Passive Portfolio Management
• Discretionary Portfolio Management
• Non- discretionary Portfolio Management

Objectives of Portfolio Management:

· Reduction or diversification of risk

· Stabilizing Income means accurate and systematic re-investment

· Capital growth

· Tax Savings or Tax planning

· Safety of Principal (Here Principal means capital invested)

· Liquidity (availability of amount as and when the investor required)

· Marketability of securities (when investor is required to sell off if comes a good opportunity)

Now in given scenario, Mr Ali and family has monthly income of RM 6,000, whereas their savings are RM5,00,000. Ali & family likes to make investments in securities but they are calculative risk takers, means they invest their funds only when they are sure of the return. If they are sure of their return they will not hesitate to invest the huge amount of money in one security.

Apart from this, they are categorized as the savers and not the spenders. They would like to save rather than to spend on the luxuries of the life.

They have 2 way objectives: Short term and Long term.

Short term objectives focuses on spending money on the investments wherein return is higher so that they can meet the expenses of their children’s education easily without taking money from outside (means loan).

Their Long term objectives are to ensure that they get good return on their investments with lower risks so that when they will retire they would not be dependent on anyone for their survival.

So from above, it is very clear that for Ali and his family, the primary objective is to have higher returns so that they can meet the demand of funds to provide good education to their children, which is rather an immediate need if compared to the long term objective of saving money for their retirement.

The secondary objective is to save money for future with fewer risks so that they can ensure of receiving funds when required, even if the return is not that high as compared to short term investments.

What is International Diversification?

International diversification of portfolio means investments in stocks and assets in foreign markets rather than in domestic (own country’s) market.

The person can reduce the exposure of risk by investing in stocks of developed countries market.

So, investing in international market can reduce the risks of the market and can provide better growth and return if compared to investment in domestic markets.

Here, in current scenario, when the objectives of Mr Ali & family are to increase the growth and return and minimizing the risks, it can be advised that they can go for International investment diversification. This will give them a chance to increase their return with minimizing their risks. However, the only thing which needs to be kept in mind is the transaction cost which may be higher in case of International investments.

Ali & family should consider this option of investing money but only after evaluating the investment options. Like which investment would be beneficial for them: domestic or international after considering all the charges involved in such investments and after considering the amount of return and risk associated with such investments.