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Accounting 1B (CAC 1208)
National University of Science and Technology
Bulawayo, Zimbabwe
Presentation by Actuarial SciencePart 1 (09 March 2015)
Definitions Investment – laying out of money or capital in an
enterprise with the expectation of profit.
Investment Account – A type of financial account that contains a deposit of funds and/or securities that is held at a financial institution. The typical objectives are to achieve long term growth, income or capital preservation from the deposited asset portfolio.
Government Stock It is a financial instrument used by the government to
finance a budget deficit i.e. difference between government income and expenditure
This expenditure is mainly in the form of long term capital investments
It largely forms part of the internal or domestic debt of a country
Refers to bonds sold by the government
Earns an interest paid annually or semi-annually
Uses Of Government Stocks Raise capital for long term projects
To finance budget deficits
Address inflation
Address unemployment
Investments
Advantages of Government Stock
Safe form of investment as payments and interests are backed by the full faith and taxing power of the government.
Investor’s bonds cannot be lost or stolen.
They are easily sold if the investor wants to cash out.
Interest payments are credited directly to the owner’s bank or investment account
No state income taxes.
The rate of return is competitive to the market
Demerits of Government Stocks
Prices can fall - Increased interest rates will cause bond prices to fall.
Political risk - Interest paid and principal payment on treasury bonds is subject to political risk, bonds are issued over a long period of time and anything can happen in those times
Broker mark up - Those who buy government bonds through a broker receive the yield for price the broker offers
Demerits of Government Stocks
To reap the full reward of the investment, it may take up to thirty years of waiting for the bond to mature.
References GoBankingRates
http://www.gobankingrates.com/personal-finance/advantages-disadvantages-treasury-direct-bonds/
Zacks
http://finance.zacks.com/advantages-disadvantages-bonds-2350.html
Unit TrustsACTUARIAL SCIENCE
WHAT ARE UNIT TRUSTS ?
Defined as:
Collective investment schemes that allow investors to pool their money together in a fund managed by a professional fund manager, who will buy variety of different holdings.
Unit holders do not purchase the securities in the
portfolio directly
Ownership of the fund is divided into units of
entitlement.
FEATURES OF UNIT TRUSTS
The number of units held depends on the unit purchase
price at the time of investment and the amount of money
invested.
The return on investment of unit holders is usually in the
form of income distribution and capital appreciation.
Unit trusts allow investors to have easy access to a wide
range of investment exposures not normally available to
them.
FUND MANAGER
A Fund Manager is a person hired by the Financial
Services Company, or bank, who manages
investments on behalf of a number of investors while
being supervised and monitored by the financial
services company
S/He invests the pooled funds in a portfolio which may
include the following asset classes:
Bonds & Deposits
Shares
Property
Commodities
BENEFITS OF UNIT TRUST
Affordability: Unit trusts are very affordable. Investors can start with low investment amount.
Liquidity: Unit trusts are easily bought and sold.
Diversification: Can concentrate on more than one
or two investment portfolios, reducing risk of losses
Professional Fund Management: Approved
professionals have training and experience that enable
them to make better decisions on investments
BENEFITS OF UNIT TRUST(CONT’D)
Investment Exposure: For an individual investor, it is
sometimes difficult to gain exposure to a particular
asset class.
Wholesale Investment Costs & Access to Other
Assets classes: Fund managers invest in larger
amounts, they are able to get access to wholesale
yields and products
The Comfort of Regulation: Regulations provide
investors with a level of comfort that they are
investing in a safe investment mechanism.
DISADVANTAGES OF UNIT TRUSTS
Unit Trusts are not allowed to borrow, therefore
reducing potential returns.
Bid/Ask prices exist - with the price that you can
buy a unit for usually higher than the price you
can sell it for - making investment less liquid.
Not good for people who want to invest for a
short period.
Not good for people who want to avoid risks at
all costs.
TYPES OF UNIT TRUSTS
Equity Funds
Money Market Funds
Fixed Income Funds
Real Estate Investment Trusts (REITS)
Exchange Traded Funds (ETF)
Balanced Funds
Equity Funds
An equity unit trust is the most common type of
unit trust
The major portion of its assets are generally held
in equities or securities of listed companies.
Money Market Funds
Money market funds operate in a similar way to
a bank account, in that the unit price is normally
set at a fixed amount
Money market funds invest in low risk money
market instruments that are in effect short-term
deposits (loans) to banks and other-low risk-
financial institutions, and in short-term
government securities.
Examples
The following slides will show us Real Life examples of
Unit Trusts.
In their order, they have been provided by:
1. Afrasia Capital Management
2. Old Mutual
Fixed Income Funds
These funds invest mainly in government securities,
corporate bonds, and money market instruments
such as bankers acceptance and fixed deposits
The objective of a fixed income fund is usually to
provide regular income
It is possible, however, for fixed income funds to
generate both capital gains and losses during a
period of volatile interest rate.
Real Estate Investment Trusts (REITs)
REITs invest in real properties, usually prominent
commercial (office) property
By acquiring units in a listed REITs it is possible
to invest a small amount to gain exposure to
the property market and have diversification
in a portfolio.
Exchange Traded Funds (ETF)
ETF is linked unit trust fund whose investment
objective is to achieve the same return as a
particular market index
ETF often have low expense ratios and can be
bought and sold throughout the trading day
through a stockbroker, on an exchange.
Balanced Funds
Some investors may wish to have an investment
in all the major asset classes to reduce the risk of
investing in a single asset class
A balanced unit trust fund generally has a
portfolio comprising equities, fixed income
securities, and cash.
References
Datvest, November 2012 News letter
Digital Look, http://www.digitallook.com/
SlideShare http://www.slideshare.net/sp4532/the-
pros-and-cons
www.investopedia.com/terms/p/purchasing power
Making Sense of Unit Trusts, produced by IMAS
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