GSBS6130 Corporate Finance : Purpose of Investment

Introduction

The organizations that are preforming in the modern world look for new and innovative techniques so that they can improve their operational activities. With respect to this scenario, this question tries to answer to two questions that have been provided in the case study. The first question will try to answer the various significant factors that are considered by the employees of the tertiary sector while deciding on their contributions in Superannuation in the Defined Benefit Plan and the issues that are associated with the concepts of the time value of money in the process of decision making.

The next question that is under consideration involves the explanation of a market hypothesis that is effective and true that might influence the managers of pension funds to choose a portfolio with a pin. The paper answers the reason that why it is not the case. These two questions will be helpful for determining the answers that will bring out the appropriate results.

Answer to Question No 1

It is seen that there are various causes and reasons that are essential to be considered by the employees functioning in the tertiary sector during the time when it is determined whether to keep their distinct contributions of superannuation in the relevant benefit plan with respect to the investment choice plan. The primary concentration is on the superannuation thereby to influence the individuals to save so that they can invest in the coming years so that during their retirement years that will try to intensify the in Australia within the previous two years. There are various concerns that are related to the concept of time value of money that can additionally aid the process of decision making (Dold and Levine 2014). The reduction in the degree of contribution of the employers to the superannuation was discovered to be only 3% of the salaries that has led to the rise to a minimum contribution of 9%. It is seen that the Government of Australia has been taking the initiative with respect to the consideration to the similar factors that are demanding least possible contribution that complies with the retirement or the superannuation funds by the employers on behalf of the employees. It is seen that the employees get inspired for assigning a portion of their earnings in the superannuation fund as a purpose of investment (VanDerhei 2015).

According to the laws of the superannuation and every individuals, it is seen that the rise in the realization in accordance to the significance of saving their earnings for future and it is seen with respect to the recent set of events that there are contributions in superannuation of billion dollars. This process is undertaken each year by the superannuation funds and the financial associations. The primary factor for introducing these policies for the creativities of superannuation has described the need to reduce the load from the shoulders of social security system for the endowment of pension payments thereby supporting the individuals during their age of retirement by giving them a proper lifestyle. Furthermore, the function of the financial institutions is to undertake investments in specific contributions in a profitable manner thereby offering appropriate earnings to aid the aspect of the life of a person that is non-working (Stiff et al. 2014). Additionally, superannuation along with mutual funds is discovered to be one of the huge investors in the Australian financial market that is distinctly in the equity securities of a company that have been listed in the share markets that are located domestically and internationally. This process can be understood with the help of an example that has been discussed below:

It is seen that UniSper Ltd is one of the biggest superannuation fund that functions for individuals and organizations that provides various services so that a person can deal with the superannuation within the tertiary sector of Australia. The fund considers the higher education institutions, colleges and universities. There have been various rebels inside the management of the superannuation fund with the prerequisite of service in the present years, which has made sure a rise in various products of superannuation fund with the revealing choices of the retirement and the investment plans (Kolachina, Krishna and Randle 2014). By looking at the various funds where the level of investment has increased, UniSuper Ltd gives their members superannuation fund comprising of two types namely the investment choice plan and explained benefit plan.

Explained Benefit Plan, as disclosed by the name is one of the plans within which the advantages given to the employees with respect to their retirement is described by the implementation of a formula that are inclusive of several factors like the number of years employed with respect to their age and final aggregate employee salaries (Freeman  and Zerler 2016). Furthermore, this plan has a computation process by considering the benefits received after employee retirement and that is shown in the following way:

Retirement Benefit= Membership lump of the salary benefit length- fraction of the sum factor aggregate service

The employees in the tertiary sector who are in the opinion of adopting Explained Benefit Plan discover that their contributions towards superannuation are collected and then invested in a group of asset that has been selected by the management of UniSuper Ltd. During the computation of the payout of the final benefit with the help of the formula discussed above, and the results of the investment of the asset portfolio that has been found to be efficient and does not have any effect on the total retirement payout that are inclusive risk related to investment induced by UniSuper Ltd (Bradley 2016). It is seen that UniSuper Ltd undertakes the individual risks by them. Therefore, it is seen that the employees do not gain any advantage from the profit that is gained with the help of the asset portfolio that is a bit over the minimum requirement in order to fulfil the benefits that were defined. The management of the plan believes of having more benefits that are based on the yearly adjustments. Conversely, there is no assurance that it would create a small segment of the overall advantages that are related to the superannuation of the plan.

The employees that are choosing the investment choice plan would keep individual accounts of investment comprising of superannuation of individuals and the contributions that are sponsored by the employer with the annual gains distribution that is gained through contributions that are invested minus the administrative and the management cost (Hwang 2013). It is seen that the secure fund is related to the fixed-interest cash and the Australian securities. Ten fund that is stable in nature is related to the bond stocks and fixed-interest that has small exposure to the global and the national shares and properties. The selection fund of the management refers to the balanced fund that is related to the global and the national shares and the investments of the private equities. These fund shares are the solitary investments that are seen in the international and national shares (Stiff et al. 2015).

The process of return and risk mainly aids in differentiating the strategies where the funds that are secure has the minimal value of risk and it is possible to bring out the lowest aggregate return.  It is seen that the time value of money is believed to be the area that must be taken into consideration by the investors as a dollar in hand at the present time is more than the dollar that had promised with the coming years.  The money that is earned can be exploited for investment thereby earning capital gains and the earned interest (Wang et al. 2015). It is seen that a currency that is expected to increase in the future may not increase as expected due to the rise in inflation. It is seen while undertaking decisions with respect to investment, it is seen that time value of money serves as a process that discovers the future cash flows that may have increased due to the decisions regarding the market  by looking at the opportunity cost. Therefore, it can be said that time value of money is one of the important financial concept.

It is seen that the investors may think that the future can be uncertain and risky and the outflow of cash may in the control due to the fact that the payment of the individuals may be given to the parties. The chances of future cash inflows are less as it mainly depends on the creditors and the banks. With respect to the investment selection plan, the employees have the power to choose from the various types of assets and where the superannuation has been invested and choosing from the investment strategies discussed below;

Stable fund: It is a type of fund that majorly includes the fixed interests with the bond securities that has a lowered exposure to the international and local shares and property.

Shares Fund: The investments in this case are dependent on the shares that are global and domestic.

Secure Fund: The securities and cash of Australia

Trustees Selection Fund: The international and the local shares for the balanced fund along with the assets and the property and even the infrastructure investments and the private equity.

It is seen that these strategies can be differentiated by looking at the risk and return characteristics with the secured funds that has more risks and are also being predicted to bring out total aggregate return. The employees who think of choosing the investment selection fund, their retirement payout is dependent on the returns collected with the help of their chosen investment strategy and they function with the investment risk associated (Khatun et al. 2015). It is seen that there are various pension plans and investment options that have been discussed below:

Indexed Pensions: These are the type of pensions that brings out a normal income that is indexed in the inflation and is thought to be payable till the time an individual survives and then it is reassigned to the spouse of the individual or is dependent on the death of the person.

Allocated Pensions: These are the type of pensions that brings out the normal income at the degree of the choice, if desired can give access to the capital of a person and the four specific investment strategies that are available depending on which the individual capital can be invested. In case of death of an individual, the pension balance is distributed the nominee of the individual.

Individual life indexed pensions: These pensions offer a higher amount of income in comparison to the general indexed pension that have been discussed above and but are not reassigned after the death of the person.

Roll-over options: These options give out the persons with the choice of reassignment for the roll over for the retirement fund balance of the individuals with the superannuation of the industry, sanctioned investment or individual fund with an sanctioned deposit  fund with an account of retirement savings.

Part-cash distributions: These distributions provides a person with a choice for collecting a demanded percentage of the retirement fund of an individual that requires regulatory and tax approvals as a heap cash for the employees who are undertaking the investments or for the intention of personal consumption. In this method of undertaking decisions by a person, it is seen that various deliberations with respect to the investment risk with the inflation and time value of money.

Answer to Question No 2

The effective market hypothesis, even called the random walk theory, is dependent on the intentions that the current prices of the stock wholly give stress on the information that is accessible regarding the valuation of the firm. Furthermore, there are no choices that is left for gathering higher profits by taking help of these data and information. This factor thinks about the crucial financial problems, which proposes to explain the factor behind the transformations in the price of the stock markets and the processes with the help of which these changes take place (Burton and Shah 2017). It is seen that a huge number of investors have taken an exertion to publish several securities that remains undervalued and they are thought to rise with respect to the value in the upcoming years. The investors that are considered are found to be the manager of the pension fund who chooses several types of securities that can outclass the market. It is due to these factors that the pension fund managers try to bring in several methods of estimating and undertaking valuations so that proper decision making can take place (Bodie 2013).

It is even seen that the managers of the pension fund have several edges that can be altered to bring out profits. The investors predict that a market can be granted as effective and this factor explains the prices whether they are low or high.

It is even seen that if an effective market hypothesis comes good, then the manager of the pension fund can consider of choosing a portfolio by taking help of a pin. Conversely, it is seen that it is not the case, because of the factor that concluding portfolio cannot be prolonged (Chan et al. 2013). Therefore, these funds are inclusive of extraordinary risks that may not be rewarded. The other thing that has been noticed is that highlighted portfolio can have higher systematic risks with respect to the investors, which may lower the total return on investment. It is seen that in circumstances the investors have extra capital, which they can invest in the assets that are risk-free, then it may not create any problem. Conversely, if this is not the condition, the portfolio can bring out higher value of beta when risk predilections of persons are provided (Westerlund and Narayan 2013).

The other related consideration with the non-perfect market is the obtainability of the taxes. It has been discovered that investors generally have tax conditions that are serious in nature. It has been observed that because of the equilibrium method, there has been excess of few assets because of higher taxability (Fievet and Sornette 2016). The profit from these assets after tax to the investors in low amount is demanded. Therefore, such deliberations makes the tax status a vital variable.

It is seen that by looking at the discussion given above, it is essential for the managers of pension fund to make sure that efficient divergence of the portfolio occurs. Conversely, a higher number of the stocks is not adequate for undertaking divergence. Furthermore, it is the solitary liability of the manager of the pension fund to make sure that the risk related to the portfolio is appropriate to the customers of the managers (Crampton 2015). It is seen that at the conclusion that the pension fund manager requires to edit the portfolio in such a way so that the profits can be attained with respect to the laws associated to the pension fund special taxes.

Conclusion

This paper therefore in the first question discuses about the the various significant factors that are considered by the employees of the tertiary sector while deciding on their contributions in Superannuation in the Defined Benefit Plan and the issues that are associated with the concepts of the time value of money in the process of decision making. A proper explanation of the process is given. The second question discusses about efficient market hypothesis and it is seen that this method is useful for the identification how the pension fund managers diversify the portfolio of the client in order to reduce the degree of risk and taxes.

Reference List

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