Investment Accounts: Government Stocks and Unit Trusts

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Accounting 1B (CAC 1208) National University of Science and Technology Bulawayo, Zimbabwe Presentation by Actuarial Science Part 1 (09 March 2015)

Transcript of Investment Accounts: Government Stocks and Unit Trusts

Page 1: Investment Accounts: Government Stocks and Unit Trusts

Accounting 1B (CAC 1208)

National University of Science and Technology

Bulawayo, Zimbabwe

Presentation by Actuarial SciencePart 1 (09 March 2015)

Page 2: Investment Accounts: Government Stocks and Unit Trusts

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.

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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

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Uses Of Government Stocks Raise capital for long term projects

To finance budget deficits

Address inflation

Address unemployment

Investments

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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

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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

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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.

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References GoBankingRates

http://www.gobankingrates.com/personal-finance/advantages-disadvantages-treasury-direct-bonds/

Zacks

http://finance.zacks.com/advantages-disadvantages-bonds-2350.html

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Unit TrustsACTUARIAL SCIENCE

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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.

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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.

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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

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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

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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.

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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.

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TYPES OF UNIT TRUSTS

Equity Funds

Money Market Funds

Fixed Income Funds

Real Estate Investment Trusts (REITS)

Exchange Traded Funds (ETF)

Balanced Funds

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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