Uncertainty and Evaluation of Public Investment †Free Samples

Question: Discuss about the Uncertainty and Evaluation of Public Investment. Answer: Introduction: Superannuation fund in the service sector is provided to enable individuals to have safe and secure retirement. This investment approach has been promoted from past twenty years to ensure secure future for employees. Strategies investment is essential for tertiary sector employees because they have shorter employment period as technology is continuously changing, and they get early retirement in comparison to other business sectors. The government also encourages it and supports it through tax benefits. Minimum standards are set by the government for the contribution for employees as same time for the management of superannuation funds (Cummings, 2016). It is compulsory for the employees of the service sector to make superannuation from their wages and salaries. They are encouraged to add on superannuation contribution with an outstanding contribution, containing changing their wages or salaries into superannuation contributions. However, they are not mandatory to invest in the speci fic fund as for this purpose; they have two primary options description of which are enumerated as below: It is retirement plan that employer sponsors, where employees profits are calculated using a formula that relates to factors like history of salary and length of employment. Some rules and regulations show by when and what method an employee can withdraw his funds by avoiding penalties (Basu and Andrews, 2014). This option provides a guarantee of benefit and payment on retirement. Benefits can be given as withdrawn as monthly payment all through employees lifetime or a sum total of the amount on retirement. This plan delivers retirement income, and this amount lasts all through retirement age which also makes budgeting easier. It is an almost risk-free investment as returns or maturity benefits are pre-defined through which investor is not required to borne any kind of risk during the tenure of investment. Payment options under this plan are as follows: Single life annuity Survivor annuity Lump sum payment In this option, the investor gets fixed amount on a monthly basis after their retirement and till their death. However, it cannot be transferred to the beneficiary of the diseased party. In this option also investor get fixed amount on a monthly basis after their retirement and till their death but after death, this amount will be provided to the beneficiary or surviving partner of the diseased party. In this option, fixed amount is received at the time of retirement inclusive of interest and principal amount. On the basis of benefits, there is fluctuation in the monthly instalment to be paid by tertiary sector employee. In this option, the return of investment increases with the increase in tenure and amount of monthly instalment. Investment choice plan In this type of plan, an individual can choose to invest as per their customised needs. Nearly all superannuation funds will offer a variety of investment options to choose from. These options vary at their level of risk. In this option, it is necessary for an investor to understand that how and where the superannuation money is invested. Multiple investment portfolios are also the opportunity to spread super money (Chant, Mohankumar and Warren, 2014). One benefit of investment earning is that they are taxed in a different way to other income. Selection of option helps in investing super that offers a diversified mixture of investments. This option makes them enable to invest in a blend of the single asset class in which each option includes different risk and returns policy and suggest different investment time frames. Four investment strategies covered in this option is as follows: Secure fund Share fund Trustee fund This is the least risk and return containing option. This is similar to defined benefit plan but with higher returns. This is the most risk and return containing option. In this value of investment fluctuates as per market condition without any guaranteed covers. In this option, the amount is invested by a broker who is considered as trustee of investment till the retirement of the employee. The trustee in this option is investment expert to attain optimise return. Factors affecting selection of investment plan Following factors are required to be considered by employees for the tertiary sector for selection of investment plan: Risk appetite: The capability of bearing risk differs from person to person, depending on factors such as financial duties, responsibilities, Further considering ability to take risk becomes an essential factor in investment decision making (Barton and Wiseman, 2014). However, if the individual does not want to bear higher risks, then they can choose defined benefit plan because it contains predetermined benefits without any fluctuation. Further, if the person intends to invest the super and has the capacity of bearing risk, then they can choose investment choice plan. Investment Horizon: In defined benefit plan employee cannot invest his pension until retirement. The super is secured for the future. However, in the case of investment choice plan, they can invest the amount by choosing the better alternative as per their requirements. Still, risk element is comparatively high in investment choice plan. Investible surplus: In Investible surplus employee has to determine that how much money can be kept aside for investments. It is imperative in selecting from a variety of asset classes because the minimum investment amounts vary, and so do the risks and returns (Gallery, Newton and Palm, 2011). In defined benefit option there is a requirement for the minimum, and fixed amount of investment on a continuous basis, however, same is not required in investment choice plan. Investment need: Investment needs has to be determined earlier to investment. In this, the individual has to identify that how soon they need their money or are they in a position to invest for a long term period (Halim, Miller and Dupont, 2010). Further, they are required to determine that how much money to invest in a month or year to reach the goal. Expected returns: In defined benefit plan returns are fixed, but in investment, choice plan returns depend on how the money is invested, risk level, for a short or extended period of time of time. The longer the time horizon will be greater the returns can be expected. Issues related to time value of money significant to making investment decisions In the present era, time value of money is necessary to be considered by investors because it has a substantial impact on the yield of an investment. As per this concept, worth of currency today in hand is worth more than the currency in the forthcoming year because of inflation and other economic factors (Butt and et.al. 2014). The employees in the tertiary sector will be required to make regular contributions to the selected retirement plan for investment in a superannuation fund. For this decision, they have an obligation to provide significantly to the time value of money by considering the fact of the increase in invested amount with interest earned. The major issue in this aspect is related to opportunity cost in which investor must be assured that selected option is better than rejected choices by obtaining a higher yield. In addition to this, they are required to consider after how much time they will be getting gain from invested amount as the time value of money indicates s ooner is better (Arrow and Lind, 2014). Thus, if they are getting delayed return, then they must ensure that return is comparatively higher. With this approach, they are required to discount the future return to determine its present value in order to select option with maximum benefits. This will show employee, worth of investment in present through which computation can be made for total value of investment. For example if investment plan provides following two options to receive their retirement income Option 1: Take $5,000,000 immediately at the time of retirement. Option 2: Get paid $600,000 every year after retirement for the next 10 years. In option 1, employee will get $5,000,000 and in option 2 $6,000,000 after their retirement. Without considering time value of money, Option 2 seem better because employee gets extra $1,000,000. However, the theory time value of money says that amount paid in future has less worth in present. Thus decision has to be made by figuring out how much option 2 is worth today by investor on the basis of discounting factor. In accordance with the above description, it can be concluded that there is no perfect option for investment in general as it will vary as per risk bearing capacity and return desired by tertiary sector employees. Further, each investment option for tertiary sector employee has its own pros and cons due to its nature. In making such investment decisions, they are required to consider their current financial condition and future goals to justify their investment objectives. By this study, the conclusion can be drawn that if employees have less tendency to bear risk then they should consider defined benefit plan and but if they desire higher and customised returns then they should go for investment choice plan. In accordance with the theory of efficient market hypothesis (EMH), it is not possible to beat the market regarding return on investment. It is because; EMH states that price of a share is affected by all the available information in the market. Due to this factor, stock market efficiency leads to existing share prices that always contain and represent relevant information. As stated by EMH, stocks are always traded at their fair values on the stock exchange (Brealey and et.al. 2012). Thus it is not possible for the investor to buy shares at a low value and sell stock at inflated prices. Consequently, it is not feasible to beat the whole market through expert stock selection or market timing. An investor can acquire significant returns only by purchasing risky investments. The pension fund is a fund which provides retirement income. A pension fund manager responsibility is to implement a funds spending strategy and to conduct its portfolios trading schemes. The pension fund manager has to make sure that pension schemes are running efficiently or not (Keynes, 2016). The fund manager makes sure that the deposits of the maturity schedules occur at the same time with the demand for loans. More attention has to be paid by the fund manager on the main elements of Cost and risk to capitalise on the cash flow opportunities. By considering the above-described aspects, it can be concluded that cited statement is wrong because the theory of EMH does not stipulate that the portfolio selection has to be done with a pin due to the following reasons- The manager has to do some paramount jobs like ensuring appropriate diversification in the portfolio. Well-diversification is essential for the portfolio to optimise the risk and maximise Investment in a significant number of stock is necessary, as one type of stock is not sufficient to ensure diversification (Lee, Lee and Lee, 2010). The requirement of a vast number of investment is needed to get higher returns with minimum risks. Its not worthy to invest all the money in one investment. A well-diversified portfolio is imperative to achieve high yields (in any market condition). For this aspect, it is significant to ensure that the risks of the diversified portfolio are appropriate for the company as well as clients. In the case of the pension fund, the manager has to choose a risk-free investment (Yal?n, 2010). The management must assure that the risk must be according to the bearing capacity of the client and it is not higher than it. The company must choose safe investments in this case. The manager must pick those stocks which are safe and riskless or merge portfolios with lower beta. In such cases, the manager can change the portfolio to take advantage of special tax laws for pension funds. The government gives privately retired plans for encouraging people, and these rules could raise the assumed return of the portfolio without expanding the risk. References Arrow, K.J. and Lind, R.C., 2014. Uncertainty and the evaluation of public investment decisions. Journal of Natural Resources Policy Research, 6(1), pp.29-44. Barton, D. and Wiseman, M., 2014. Focusing capital on the long term. Harvard Business Review, 92(1/2), pp.44-51. Basu, A. and Andrews, S., 2014. Asset allocation policy, returns and expenses of superannuation funds: recent evidence based on default options. Australian Economic Review, 47(1), pp.63-77. Brealey, R.A., and et.al. 2012. Principles of corporate finance. Tata McGraw-Hill Education. Butt, A., Donald, M.S., Foster, F.D., Thorp, S. and Warren, G., 2014. The Superannuation System and its Regulation: Views from Fund Executives. Chant, W., Mohankumar, M. and Warren, G., 2014. MySuper: a new landscape for default superannuation funds. Cummings, J.R., 2016. Effect of fund size on the performance of Australian superannuation funds. Browser Download This Paper. Gallery, N., Newton, C. and Palm, C., 2011. Framework for assessing financial literacy and superannuation investment choice decisions. Australasian Accounting Business Finance Journal, 5(2), p.3. Halim, S., Miller, T. and Dupont, D.C., 2010. How pension funds manage investment risks: A global survey. Keynes, J.M., 2016. General theory of employment, interest and money. Atlantic Publishers Dist. Lee, C.C., Lee, J.D. and Lee, C.C., 2010. Stock prices and the efficient market hypothesis: Evidence from a panel stationary test with structural breaks. Japan and the world economy, 22(1), pp.49-58. Yal?n, K.C., 2010. Market rationality: Efficient market hypothesis versus market anomalies. European Journal of Economic and Political Studies, 3(2), pp.23-28.