Analysis of Investment Tools

The investment management tools are defined as tools which act as a vehicle to invest money for a particular period of time. There are two investment avenues which include financial and non-financial assets. The financial assets include debt and equity. The non-financial assets include real estate and gold investment. There are mainly four types of investment which include financial securities, non-securitized financial securities, mutual fund scheme and real estate. Following are the analysis of major investment tools on the basis of risk, returns, maturity and others.

Financial securities: The financial securities include equity shares, preference shares, convertible debentures, non-convertible debentures, public sector bonds, saving certificates, and money-market securities. The securities are mainly divided into two markets namely debt and equity. The debt includes long-term loan which is mainly issues by a government agency. These are fixed income instrument, and it is related to the government body, so the risk involved with the bonds are very low. The equity investment instrument includes common stock, buying preferred stock, private equity and others (Alcock et al, 2013). The equity stock deals in the stock market, so the risk involved with an equity stock is high because it deals with the shares.
Non-securitized financial securities: The non-securitized financial securities include bank deposits, post office deposit, company fixed deposits, provident fund schemes, national saving schemes and life insurance. What the risk involves in bank deposit is very low but the returns are moderate, and other non-financial securities are also having low risk and the returns are also average.
Mutual fund scheme: The mutual fund is a mechanism in which polling of investment by a number of investors is managed by professional fund managers who are known as portfolio managers. The risk is moderate because it is managed by portfolio managers. It included open-ended and closed-ended funds (Yogo et al, 2016).
Real estate: The real estate investment is mainly done by pooling huge amount of funds for long term. There is always a possibility of appreciation in investment because land value is not depreciated with a span of time.

The financial health of Mr. X is quite satisfied because he has already paid all the expenses and currently he is not having any financial need, so with the funds of SGD 1.3 million the financial goals can be achieved easily by investing SGD 1.3 million in an investment portfolio rather than investing in real estate.

Following are the reasons for considering investment portfolio:

The investment in real estate is a pooling of funds in a single asset class which includes high risk whereas the investment in diversified portfolio includes pooling of funds in different assets class which will diversify the risk among different assets class (Dolvin et al,2012).
The real estate is providing 24% returns for 2 years which will provide SGD 156,000 returns yearly whereas the returns from a diversified portfolio are between SGD 91,000-156,000 which is covering the annual expense of son's education which is SGD 71,000 per year, and the risk is also diversified with covering the financial goal.
By choosing portfolio investment liquidity needs are also fulfilled with minimum need and according to the life cycle of investment Mr. X is on Delta stage where he is retrench with some compensation and his wife is working in a family. The college expenses are on the horizon and at this stage taking a huge risk by investing is a single asset class is not suitable for him (Roncalli et al, 2016).
The real estate is providing full insurance, but it is not required according to the needs of Mr. X financial goals so investing in the portfolio will diversify the risk.
The bank is providing 1% returns whereas the inflation rate is 3% so investing in a bank deposit will not able to meet the financial goals.

Recommendations

According to the above analysis it is recommended that investing in diversified portfolio will help to meet the financial goals because of the following reasons:

Risk: The risk involved in single assets class by investing in real estate is high whereas the risk involved in portfolio investment is low because the risk is diversified among different assets class.
Returns: The returns in investing portfolio are from 7-12% which is SGD 91,000-156,000, so the yearly expenses of SGD 71,000 are covering whereas the returns in real estate are for two years and the risk is uncertain.
Financial goals: The financial goal required meeting the son’s education expenses and according to the stage of investment life cycle, Mr. X can bear a moderate risk because he is at Delta stage.
Insurance policy: The insurance of medical and health are already done so there is no requirement of insurance according to the financial goals of Mr. X.

Conclusion

According to the analysis of Mr. X financial heath, it is concluded that the financial health is quite stable. The financial goals of Mr. X can be meeting easily by maintaining the liquidity, and risk tolerance is moderate because according to the investment life cycle, Mr. X is at Delta stage where he is retrench with some compensation and his wife is working. The college expenses of children are on the horizon. The diversified portfolio investment is suitable to meet the financial goals of Mr. X. The risk can be diversified between different assets class with the satisfied returns. The aim of financial planning is to meet the financial goals according to the need which can be satisfied by investing in the diversified portfolio.

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References

Alcock, J., Baum, A., Colley, N., & Steiner, E. (2013). The role of financial leverage in the performance of private equity real estate funds. The Journal of Private Equity, 17(1), 80.
Dolvin, S. D., Jordan, B. D., & Miller Jr, T. W. (2012). Fundamentals of investments: valuation and management.
Roncalli, T., &Weisang, G. (2016). Risk parity portfolios with risk factors. Quantitative Finance, 16(3), 377-388.
Yogo, M. (2016). Portfolio choice in retirement: Health risk and the demand for annuities, housing, and risky assets. Journal of Monetary Economics, 80, 17-34.

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