Value Of Money And Portfolio Management †Myassignmenthelp.Com

Question: Discuss About The Value Of Money And Portfolio Management? Answer: Introducation In todays time organisations encourage their employees to save money in order to secure their future. In this context governments has also made many provision regarding some schemes which will be beneficial for employees current as well future situation. Employees are encouraged to invest in superannuation plan to get maximum retirement remunerations from that. Employees are the soul of every organisation. They are the backbone which provide support and growth to the organisation, hence it is the duty of every organisation to provide each and every employee a secured future. For this they should inspire and should provide retirement and saving plans to employees. There has been increase in such kind of investments. Nowadays government has become super active and has made obligatory for every organisation to make contribution in such plans instead of their employees. It is also mandatory requirement from employee side to invest some amount of their remuneration to such plans or funds. The main objective behind these steps were to provide greater support to the employees during their retirement phase. With the passing time there has been increment in the retirement plans which provide more and flexible choices to the investor to think which plan will be beneficial for them. The organisations should also consider these plans with the changing time, so that employee retention rate could be increased and the employee is willing to work them. Investment in retirements plans has hots of benefits attached to it such as it permit us to finance now for the financial security of the employee when the employee will get retire. There are lots of business as well as employee benefits attached to it such business will get the tax credits and other kind of inducements from government to start a plan. Employer contribution to such plan are deductible while computing tax. On the other hand employees will also benefited with these contributions, such as income which is liable to tax will be reduced because he/ she will get the deduction from tax of such contribution. And contributions to such plans are easy to make. Employee financial security will be increased during his retirement time. Providing retirement benefit is very important to all at every stage of age and not just to the employee who is near about retirement. It should be done in prior to provide financial security to employee during his retirement period. Let us now discuss some superannuation plans which are available in the next discussion of the topic. IAS 19 is an accounting standard that deals with employee benefits. There can be short term employee benefit and post-employment benefit. Short term employee benefits are settled within 12 months after the end of yearly reporting. And in case of post-employment benefit includes defined benefit plan and defined contribution plan. Defined Benefit Plan vs. Investment Plan which one to choose, here is the thorough study on these plans:- In defined benefit plan employer makes contribution to a retirement plan of the employee on regular basis depending on the various factors such as Duration of employment and the salary history of the employee. There will some restrictions on the withdrawal from these funds by employee and there will guidelines when and how much an employee can withdraw from fund from time to time. It is basically a specific amount which is paid by employer to the employee at the time of retirement which is calculated by the defined formula. The formula for the retirement benefit generally takes into account following factors such duration of employment, employee salary which will average salary of three or five years of earnings. The formula can be presented as follows:- = Benefit percentage* average salary in past 5 years* years of plan membership* This can be explained by an example like average salary is $60000 Duration of service or plan membership is =20 yrs Percentage of benefit to be given= 3% Yearly pension will be calculated as= 60000*20*3%= $36000 Defined benefit plan allocate their profits through life endowments, employee receive identical episodic disbursement normally monthly or quarterly for the remaining they will be in this world. There are two types of defined benefit plan these can be funded and unfunded. In unfunded plan no asset is reserved separately and the employee is paid when they retire. In funded plan employers do contributions towards this plan for meeting the paybacks but the future returns of benefit are not known in advance and hence sometimes these contributions may not meet desired level to provide benefit. On the other hand in case of investment choice plan there is an investment accounting in which employer contributions and superannuation benefits are invested and the profit earned by these investments by deducting any organizational expense are distributed to the employees. If employee choose investment choice plan then he will have option to put forward the assets and portfolio they wanting to invest in. There are many investment and pension plans available in the market, employees have to make their investment decision very wisely in choosing those plans depending upon the risk and returns attached to it. There are many kinds of investment stratagems such an employee can invest in protected fund that have fixed interest payments and money. Steady fund in which the securities are fixed interest bearing but are exposed to foreign shares and bonds. Among these two kind of approaches protected funds bears less risk than steady fund. Employees choice of investment depends upon the risk and the return he will get by investments done by him in different investment plans. Types of many traditional plans available in the market such as term plans which includes term protection is the simple form of assurance as it offers risk cover in altercation annual remunerated outlays. When the employee retires it has two options to how to treat its contribution he can allocate its investment plan or he can cope those investment plans. The employees can make their choice between the two alternatives that is defined benefit plan and investment choice plan on the basis of their preferences by keeping various factors in mind such as risk involved , return involved the time value and price increment . Both the plans have their pros and cons but for long term security one should go for defined benefit plan as it provides payment with certainty and there is less risk involve in this type of plan. One should look into the risk and returns involve in the plans and choose the best plan according to that. Many investors are risk lovers because they are only concerned with the higher return, we can say that it totally depends on the employee preferences and the risk they wanted to bear. Time value of money means is the conception that identifies the applicable value of upcoming money movements arising as a consequence of monetary choices by bearing in mind the opportunity price of treasuries. With the passage of time money value gets reduced and there are many reasons for that like inflation or increase in prices which reduce the value of money in future. Another factors could be interest rate and risk premium. For integrating the monetary influence on the effectiveness of cash flows in business decisions, time value of money principle is used widely (Open learn , 2017) The fund manager have to make the decision regarding investments, dividend for the growth of the company like purchasing of any asset or sale of any undertaking that is the investing activities have influence on the timing of cash flows of the company. In other words we can say that time value of money is a value of $1 today will be different from value of $1 in the future. The cash flows which will arise at different point of time can be made analogous by using any of the following methods: Compounding Future value of single cash flow Annuity method. Time value of money is important for decision making and this can be explained with an example like the value of pound today is more than the pound in future so the investor can use this pound today to earn return or capital gains. Pound in future will be of much lesser value than today because of inflation. There are two section in the concept of time value of money one is present value and other is future value of money (PDF, 2017) Time value of money influence the decision of fund manager to a great extent, hence a fund manager has to take many consideration in mind while making decisions. When we will be able to know the value of cash flows for future we will be capable to take the resolution where and how we have to invest or spend and how we will get the returns. Same goes with the employees if they will know the time value of money they will be able to make decisions regarding the type plan they should choose keeping in mind the future and present value of money and returns and risks associated with that (Boundless, 2017) An efficient market is demarcated as a market where there are huge number of balanced, profit maximizers enthusiastically competing, with each trying to foresee future market values of individual securities, and where important current info is easily obtainable by all partakers. The efficient market hypothesis tells us about the speed with which information influence the prices of the security. As per numerous analysts it was perceived that data is slowly integrated in the price and it provides a chance to earn extra profit. But once the information is incorporated then the investor cannot earn this extra profit. There are three levels of market efficiency which are as follows: Weak form: this form of market tells us that all the historical market prices and data are fully revealed in securities prices and here in this condition technical analysis have no usage. Semi strong form: this form tells us that all overtly or publicly accessible info is fully revealed in securities prices and hence the fundamental analysis failed and have no usage. Strong form tells us that all info is fully redirected in security prices and the insider information have no usage in this situation (Forbes , 2017) Let us discuss about the portfolio management. Portfolio management refers to an art and science of making choices about investment mix and strategy, matching investment to purpose, asset apportionment for individual and establishments, and harmonizing threat against performance. Its all about strong point faults, opportunity and pressures in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other transactions encountered in the attempt to maximize return at a given hungriness for possibility. A portfolio for an individual or a business is holding of securities and investments in monetary assets. These holdings are the result of individual inclinations and conclusion concerning danger and yield (IRS , 2017) Even if an efficient market hypothesis is true the pension fund manager will not select a portfolio with a pin because:- In efficient market all the investors have same info. Hence as an outcome the investor do not get the privilege to earn excess profit as they earn only average returns. For earning extra earning one should have to take additional risk. As the number of information channels increasing day by day even the best intricate stockholder is incapable of observing every portion of info. Other reason for not selecting portfolio with a pin even if the theory of efficient market postulate holds true is efficient market is not able to clarify additional instability. Individual generally and should invest in diversified portfolio. Investors wants high returns with low risk. Investors generally invest in diversified portfolio to earn high returns with low risk, as there is minimal long term risk in diversified portfolio. Hence the manger will and should try to invest his securities in diversified manner so that there will more return in a diversified way. Pension fund manager will look into the disadvantages of the efficient market hypothesis investment in comparison to the higher return with low risk by investing in diversified securities. References:- OpenLearn. (2017). The financial markets context. [online] Available at: https://www.open.edu/openlearn/money-management/money/accounting-and-finance/the-financial-markets-context/content-section-3 [Accessed 19 May 2017]. Morningstar.com. (2017). Model Portfolios for Savers and Retirees. [online] Available at: https://www.morningstar.com/content/morningstarcom/en_us/model-portfolios.html [Accessed 19 May 2017]. Boundless. (2017). Importance of the Time Value of Money. [online] Available at: https://www.boundless.com/finance/textbooks/boundless-finance-textbook/the-time-value-of-money-5/introduction-to-the-time-value-of-money-54/importance-of-the-time-value-of-money-255-8367/ [Accessed 18 May 2017]. Forbes.com. (2017). Forbes Welcome. [online] Available at: https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/investopedia/2011/01/12/efficient-market-hypothesis-is-the-stock-market-efficient/refURL=https://www.google.co.in/referrer=https://www.google.co.in/ [Accessed 18 May 2017]. Retiremnt paycheck (2017). Defined benefit plans [online] Available at: https://www.myretirementpaycheck.org/retirement-plans/defined-benefit-plans.aspx [Accessed 19 May 2017]. Nath, T. (2017). Investing basics [online] Available at: https://www.nasdaq.com/article/investing-basics-what-is-the-efficient-market-hypothesis-and-what-are-its-shortcomings-cm530860 [Accessed 19 May 2017]. PDF (2017). Time value of money. [online] Available at: https://www.newagepublishers.com/samplechapter/001945.pdf [Accessed 19 May 2017]. IRS (2017). Lots of benfits- employment retirement plan [online] Available at: https://www.irs.gov/retirement-plans/plan-sponsor/lots-of-benefits-when-you-set-up-an-employee-retirement-plan [Accessed 19 May 2017].