Looking For Financial Investment Advice?

Investing in financial instruments is widely regarded as an advisable and profitable channel of income-generation. However, the risks of incurring large financial losses remain too, particularly if you are a newcomer in the financial market. In fact, prudent investment decisions need to be formed, so that profits can be enjoyed, over the long-run too. There are many professional business firms that offer investment services to individuals. Apart from taking help from these firms, individuals also should hire an expert financial planner. The latter would be able to provide knowledgeable and viable financial planning advice to clients. Such advice, if followed properly, can go a long way in securing the financial future of the investors.

Recommendations related to financial planning and investment services can be varied in their nature and quite large in quantity as well. Some of the very basic rules that need to be followed while forming investment decisions are:

a) A certain portion of income needs to be put away as savings on a monthly basis. A portion of all increments should also be saved. This helps people build a decent stock of wealth over time.

b) Investments that are deemed to be extremely risky should be avoided, at least when one starts out in investment.

c) While making investments, individuals need to diversify their portfolio. Ideally, not more than five per cent of one’s total invested amount should be in a single sector. This, guards against any potential drastic losses due to a severe downturn in a particular segment of the market.

d) The basics of borrowing from different sources, including banks, need to be thoroughly understood. In particular, one needs to know the difference between the quoted ‘nominal’ interest rate of banks on loan amounts, and the actual ‘effective’ interest rate that is charged.

e) The frequency of payment of your interest (monthly, quarterly or yearly) needs to be kept track of. If people do not have the time or knowledge to invest directly on shares and monitor the proceedings, they can invest on unit trust funds as well, and

f) The costs of the different investment products need to be considered. A detailed break-up of the different components of the total cost should be studied. Cost levels vary across investment instruments, and one should know if they are too expensive or not.

The above are some of the simplest financial investment advice, which a financial advisor might provide you with. These would help to a great extent in ensuring that the investment decisions you take are correct, profitable ones.

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Internal Rate of Return: How to Measure Financial Investment

The financial analysis principle of net present value enabled us to first calculate the present value of an investment and then subtract the actual cost of the asset from its present value. The N.P.V. calculations were made with a minimum rate of return already established by the firm. In this section, in- stead of solving for the N.P.V., we solve for the internal rate of return (I.R.R.). The I.R.R. calculation measures the yield or rate of return on an investment rather than its present value. The present value is assumed to be the initial cost of the asset. The I.R.R. calculation measures the yield from a series of cash flows across a specified period of time and includes the cost of the asset, the cash flows from the asset, and the salvage value of the asset at the end of its useful life. In the case of plant and equipment, an asset’s useful life may be exhausted at the end of a period due to functional or technical obsolescence. The useful life of real estate, which may actually increase in value over time, is said to be exhausted when the property is divested.

Let’s look at an example. Assume Investor Lincoln wants to add an additional space to a small retail strip center. Construction costs to add the space are estimated to be $100,000. As illustrated in Table 7.3, Lincoln has two choices. In Scenario 1, he can lease the space to Tenant A, on a lease-option agreement for three years at a rate of $10,000 per year and then sell the space at the end of the three-year period for $110,000. In Scenario 2, he can lease the space to Tenant B on a lease option agreement for six years at a rate of $10,000 per year for the first three years and $12,500 for the next three years, then sell the space at the end of the six-year period for $120,000.

The internal rate of return in Scenario 1 is 12.94 percent. The income generated from three years’ worth of cash flows is the equivalent of earning an annualized rate of return of 12.94 percent on Investor Lincoln’s initial investment of $100,000. If, however, Investor Lincoln chooses to hold the property for six years, his yield increases to 13.40 percent. Because the I.R.R.s in this example are marginally close, there may be other factors such as tax issues that could affect Lincoln’s decision to choose one scenario over the other; however, with all other things being equal, the higher yield in Scenario 2 suggests that Investor Lincoln should choose this alter- native over Scenario 1.

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