Investing In Super Annuation Funds to Availâ€Myassignmenthelp.Com

Question: How To Investing In Super Annuation Funds to Avail? Answer: Introducation In the past two decades there has been a growing focus on investing in super annuation funds to avail large scale retirement benefits. It is been a growing trend since a long time, as large number of people workers are getting aware of the benefits that can be reaped from such investments. They are helpful not only for the present but also for the future. The employees are responsibility of the company, after the employees retire it is important that they have a steady flow of income that will help them in their old days. In previous age, there were not many such plans that would help the employees to help them in their post retirement period, but with revolution , it id an important aspect that all the companies must consider so that their employees are keen to work with them. A large number of companies including the government are nowadays focusing on encouraging the individuals to save and invest their money. The government has been proactive in this regard and has made it compul sory for all the employers to make mandatory contribution to these superannuation and retirement funds on behalf of their employees. The employees are also required to make a fixed contribution to these funds, and allocate a low fixed percentage of their income to such superannuation funds. The main idea behind these funds was to reduce the burden on the society to support such individuals during their retirement phase. (HDFC Life Blog, 2017) As a result of all these policies, a large amount of money is flowing every year in these funds, and the responsibility of the owner of all these funds is to make effective investment so that there is a steady flow of income in the retirement phase of individuals. With time there has been a lot of revolution in this regard, there has been a significant increase in the types of superannuation fund products and investment and retirement plan options and provides great flexibility to the members to decide which kind of fund they want to avail and the type of investments they want to do. In a large area of focus, there are two forms of superannuation plans available- 1)Defined Benefit Plan A defined benefit plan is a type of plan that is sponsored by the employer, the employer transfers a sum of money on a recurring basis based on various factors like the length of employment and salary history. There are also restrictions on when and by what method the employee can withdraw such funds. Under the defined benefit plan the employees retirement benefit is calculated here under Retirement Benefit = Benefit salary x Length of membership Lump-sum factor Average service fraction. For employees who chose these type of plans, their benefits are pooled together and then invested into such assets that will be profitable to the employees. But their final payout is determined by this formula, and hence the overall performance of the asset risk portfolio is irrelevant and doesnt affect the overall profitability of the employees. Thus this implies that the employees are not gaining anything from their asset portfolio and it is the trust that has to fully fund these benefits. (Myretirementpaycheck.org, 2017) In case of Investment Choice Plan it retains an individual investment account comprising of employer sponsored and superannuation contributions and an annual distribution of gains earned on their invested contributions, less any administration and management charges. Under the employees investment choice plan, employees are given a option to nominate the types of assets or portfolios that their superannuation contributions are invested in, choosing between the following four investment strategies: (Wellsfargo.com, 2017) Secure fund, in which there are securities that bear fixed interests and cash. Stable Fund, in which there are securities that are fixed interest and bond securities, in these types of funds there are exposure to overseas shares and funds. Trustees Selection Fund in which there is balanced fund of domestic and overseas shares, property assets and infrastructure and various private equity investments. Share Fund, there are investments in domestic and overseas shares. These strategies are distinguishable in the manner of the risks that are born and the return that they provide. The secure funds are the least risky and will provide the lowest level of return. And the share funds carry the highest level of risk, but they also provide the highest level of return. In case of Investment Choice Plan, their final payment ratio is dependent on the returns that are generated by the chosen investment strategy and bear the risk that are associated with it. At the time of retirement, the employees are provided both the options, to manage and distribute their investment plans. These include the pensions and other investment options, there are wide variety of plans from which the people can choose from when it comes to availing long term retirement benefits Indexed Pensions that provide the income that is indexed to inflation, it is payable as long as one lives and then the same is transferred to the spouse of the deceased. Single Life Indexed Pensions: It provides a higher level of income, compared with the standard indexed pensions, but it is not transferred to the dependent. Allocated Pensions: It provides a regular income, access to your capital, and various capital investment strategies according to the capital that can be invested. In case of death the return is to given to the deceased. Roll over Options: In these type of funds, there is a option to rollover the retirement funds to an approved industry or industry superannuation or investment funds, and approved funds or a retirement saving account. Part- Cash Distribution: It gives you a percentage of your retirement fund as a cash slump to be used for investment or personal consumption. The participants are given a choice to choose from the above alternatives, on the basis of their preferences and hence that will be more beneficial to the employees, keeping the various factors of return and risk in mind, in sync with the other relevant factors like the time value and the inflation. Of the two plans, both have their own set of advantages and disadvantages but when it comes to long term security the employees should go for the defined benefit plans, because the risk factor is least and there is a steady flow of income, but where the employees are ready to bear some risk they can stick for the long term investment plans, that provides them for various alternatives, though the risk involved in the same is more, it is the return earned that makes all the difference. It entirely depends on the choice and preferences of the employees on the kind of plans they want. They must consider both the risk and return involve with all the plans and then choose the one that provides the maximum return and least amount of risks. This type of decisions depends on many factors and the same must be considered. The time value of money is an important considerate while making decision making regarding to the type of investment option one wants to avail. It influences the decision making to a large extent. As a finance manager one needs to take different types of factor in consideration while taking investment decisions. The decisions as to the amount of investments to be made in the purchase of assets or the investment are affected by the time value factor as cash flow occurs in different time periods. Time value of money simply means that the value of rupee received today is different from what received in future. Time preference of money means the preference of money in present time to that of future. There are various factors that are associated with this time value of money, risk being the topmost because it is not certain whether we will receive the money or not. The concept of time value of money helps us in reaching to a comparable value of rupee at different point of time which may b e equal to the rupee that we earn today. The cash flow at different time zones can be ascertained by various techniques. The most popular being compounding of present sum of money to a future date. And the second being compounding of future sum of money to a present date. The flow of cash becomes logically comparable when it is adjusted with the risks and other factors associated with the same. When we are able to compare the cash, we would be able to take important decisions regarding to investing and financing, keeping in view the amount of return we will eventually earn. Same goes for the employees they can decide which benefit plan to opt for keeping in mind the amount of money they will eventually earn on their retirement. The concept of time value of money is central to the concept of finance and helps us in taking important financing decisions. The value of money today is more valuable than any amount of money in the future; this is just because of the timing factor involved in the same. Thats the risk of time value of money that id associated with these retirement plans and the employees should consider the same before taking important financial decisions. The importance of time value of money is very much stated everywhere when it comes to taking investing decision on the basis of the same. (Boundless, 2017) 2 ) The efficient market hypothesis is a concept that it is not possible to beat the market because the overall market efficiency will incorporate the overall prices and the movement of the stock and will accommodate all the relevant information. (NASDAQ.com, 2017) Even if the market hypothesis id true the manager will not select a portfolio with a pin. There are two reasons for the same. The fund manager in the first place will try to select a portfolio that will have diversified securities so that the portfolio is diversified in terms of return. Also it is important that a well diversified portfolio will have different types of securities so that all the movement is not in the same direction and there is a diversification in the same. More over the portfolio should be such that it must have risk and return suited to the different fund bearer because each of the fund bearers will have different tastes and preferences in the kind of investments they want to make and the kind of retur n they want to generate. (Forbes.com, 2017)Thus the pension fund manager cannot select a portfolio with a pin. It is not a easy job to select securities for a portfolio, a lot of factors is needed to be taken into consideration for the same. The fund managers cannot take decisions just on the basis of the market hypothesis whether it is efficient or not, the several other factors are also needed to be considered by the managers. The portfolio should be such that each one who invests in the same are benefited from such type of investments. The Efficient market hypothesis doesnt entail that lection of portfolio was made with a risk. The manager has to consider a lot of factors and eventually focus on increasing the returns and decreasing the risk. Hence the above statement is not true in case of efficient market hypothesis. References: NASDAQ.com. (2017). Investing Basics: What Is The Efficient Market Hypothesis, and What Are Its Shortcomings?. [online] Available at: https://www.nasdaq.com/article/investing-basics-what-is-the-efficient-market-hypothesis-and-what-are-its-shortcomings-cm530860 [Accessed 18 May 2017]. Myretirementpaycheck.org. (2017). Defined Benefit Plans vs. Defined Contribution Plans | MyRetirementPaycheck.org. [online] Available at: https://www.myretirementpaycheck.org/retirement-plans/defined-benefit-plans.aspx [Accessed 18 May 2017]. Wellsfargo.com. (2017). Investment Types - Different Investment Options - Wells Fargo. [online] Available at: https://www.wellsfargo.com/financial-education/investing/investment-types/ [Accessed 18 May 2017]. HDFC Life Blog. (2017). Top 6 Reasons Explaining the Importance of Retirement Planning - HDFC Life Blog. [online] Available at: https://blog.hdfclife.com/top-6-reasons-explaining-the-importance-of-retirement-planning-part-1-532190 [Accessed 18 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].