Fin200 Corporate Financial Management For Assessment Answers

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Over the years, there has been a growing trend to invest in different types of retirement benefit plans, to support the employees who are working in the companies after they retire from the same. The main reason behind this growth and revolution is that previously employees were not that much aware about the kind of benefits these retirement plans could give them and moreover there were not so many varieties of plan in which people can invest. Previously awareness in this sector was very low, but with advent of time, more and more people are getting into this, as they want a steady flow of income to support them in their post retirement age. Also in addition more and more companies are including these retirement plans in their employment prospects so that more talented and capable employees are akin to work With them. There are a wide varieties of employment plans that are available today in the market, and the employees can choose any of them based on the policies of the company and also on the kind of benefits and return they want from the same. In today’s world, the government has taken a proactive step in this regard and has made it compulsory for the employers to contribute to such benefit plans. This has also led to improvement in the saving habit of the people, as they are able to save a part of their income every year in the form of investment to these plans whose befits they can reap in the future. Both the employers and the employees are required to contribute to these funds every year, so both develop a sense of responsibility for the same. The overall idea behind these kind of investment is to reduce the burden to support the employees in their post retirement phase. Because of all these policies there is steady flow of income everywhere to these funds, and the overall responsibility of the fund managers to effective investment of the total amount invested so that risk is minimum and the overall return is maximum. It is the responsibility of the mangers to make sure that there is steady flow of income from all sectors. With time and a lot of revolution, there has been improvement in the policies of these funds and also the options has also increased for the employees in the kind of plans they want to invest and the ones they don’t. It has led to great flexibility for both the employed and the employer who can make their own investment as per their own demands and preferences. When we look from the larger perspective, there are two types of superannuation plans:

Defined Benefit Plan: A defined benefit plan is the type of plan , that is entirely supported by the employer, the employer transfers affixed sum of  money in thus plans taking into various factors into consideration like the length of employment, the basic salary drawn, the number of leave availed, and on all these factors, the employer calculates a certain sum of money that is transferred every year to these types of superannuation funds. Under the defined benefit plan the employee’s retirement benefit is calculated here under –

Retirement Benefit = Benefit salary x Length of membership × Lump-sum factor ×Average service fraction. For employees who avail this type of plan, all the funds that are transferred by the employer are pooled together and invested in such assets that will provide the maximum return. However the But their final pay-out is determined by this formula, and hence the overall performance of the asset risk portfolio is irrelevant and does not 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. In case of defined Benefit plan  the risk involved is very low, and the return is fixed. H there is no chance of escalation of returns in these types of programs. The employees will receive only the amount that is calculated by the above formula, no matter how much return the company earns form investing its funds. (Irs.gov, 2017)

The other kind of plan is the 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 employee’s investment choice plan, employees are given an option to nominate the types of assets or portfolios that their superannuation contributions are invested in, choosing between the following four investment strategies.

Secure funds that provide affixed return because interest and returns are fixed. Stable funds in which there is an exposure to overseas bonds and funds  which there are securities that are fixed interest and bond securities. The Trustees selection funds are the other type of funds in which there is balance of the domestic and the overseas share, property assets, infrastructure and also various types of private investments. In case of share funds, there is an investment in the domestic and the overseas share. The employees can choose any of the option based on the type of return they want to avail and the level of risk they are ready to take. (Hdfclife.com, 2017) These securities are distinguishable because of the kind of return they provide along with the associated risk with the same. The secure funds are the least risky and provide a fixed return. The share funds are providing the maximum return but the risk associated with the same is also huge. 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.  There is also a wide variety of pension and other benefit plan from which the employees can choose from like the Indexed Pensions that provide the income that is indexed to inflation, the Single Life Indexed Pensions that provides higher return compared to indexed plans however in case of death the money is transferred to the dependant. Allocated Pensions that provides a regular income, access to your capital, and various capital investment strategies according to the capital that can be invested. Other types of plans like the Roll Over Options and the cash distributions are also there. The overall benefit from each of such plan is different and a the kind of risk and return associated is the basis of decisions. (Dawn, 2017)

Both of the plans, the defined objective plan and the investments choice plans, has their share of advantages and disadvantages. The people make their choice based on their preferences. If they want to be more secure, they can go for the defined plan, and in case they want high returns, they can go for the investment plan. When we look in the larger respective, both the plans will provide return that will help with in their post retirement phase, and it depends on the people to choose how they want to avail type advantages these plans have to offer. When it comes to long term security the define objective plans are the best and when it comes to investment choice plans, where they are provided with alternatives on the basis of which they can select the kind of investments they can make, they can choose those plans for higher return.

The time value of money is an important factor that must be consider while deciding what kind of investment one wants to make.  It influences the overall decision making largely. 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 times. The time value of money simply means that the value of rupee that we will receive today will be different what we will receive in future because inflation and other factors come into value. (Nearly Everything that I Latch On, 2017) Thus while taking important decisions we need to ascertain a sin how much we are earning from the amount of investment that we made today. The overall concept of time value of money helps us in reaching to a position where we can compare the value of money today and the value of money in the future. The cash flow in different time zones can be ascertained by different factors. The most popular is the compounding technique, in which the present sum of money is compounded to the future day and the future sum of money is compounded to the present day. In thin way, we can compare that whether we are reviving more than what we are investing and what is total amount of return that we are eventually earning. . The value of money today is more valuable than any amount of money in the future; this is just because of the timing factor implicated in the same. That is the risk of time value of money that id connected with these retirement plans and the employees should consider about the same before taking vital financial decisions. (Reddy, 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). The managers will never select a portfolio with a pin even if the market hypothesis holds true. The most important reasons for the same are that the fund managers in the first place will select the type of portfolio that has diversified risks and returns. If they invest in same type of funds, the overall movement of the portfolio will be in the same direction, because of which they will not be able to mitigate the risk and the overall growth will be hampered. More over the portfolio should have such securities so that it has wide variety of risks and returns suited to the taste of the fund bearers because each of the fund bearers will have different level of taste and preferences. (Morningstar.com, 2017) Therefore, the pension fund manager cannot select a portfolio with a pin. Selecting securities and lassos to ascertain how much investment is to make in each type of securities is not an easy task, and the fund manager has to take several steps and take into consideration several factors before taking such decisions. The portfolio should be such that each one who invests in the same are benefited from such type of investments. The Efficient market hypothesis does not demand that selection of portfolio was made with a risk. The manager has to consider many factors and eventually focus on increasing the returns and decreasing the risk. Hence, the above statement is not accurate in case of efficient market hypothesis. The fund manager cannot choose portfolio with a pin in case of efficient market hypothesis. (Open Learn, 2017) 

References:

Irs.gov. (2017). Choosing a Retirement Plan: Defined Benefit Plan. [online] Available at: https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-defined-benefit-plan [Accessed 19 May 2017].

Dawn, S. (2017). 6 investment options for the retired - The Economic Times. [online] The Economic Times. Available at: https://economictimes.indiatimes.com/wealth/invest/5-investment-options-for-the-retired/articleshow/54222117.cms [Accessed 19 May 2017].

Hdfclife.com. (2017). 8 Best Long Term Investment Options in India for 2017 by HDFC Life. [online] Available at: https://www.hdfclife.com/insurance-knowledge-centre/investment-for-future-planning/best-long-term-investment-options-in-2015 [Accessed 19 May 2017].

Reddy, S. (2017). What is Time Value of Money? Financial Planning & TVM Calculations. [online] ReLakhs.com. Available at: https://www.relakhs.com/what-is-time-value-of-money-tvm/ [Accessed 19 May 2017].

Nearly Everything that I Latch On. (2017). Time Value of Money and its importance | EkendraOnLine.com. [online] Available at: https://ekendraonline.com/engg/economics/time-value-of-money/ [Accessed 19 May 2017].

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].