Saturday Brain Storming Thought (130) 11/09/2021
COMPILED BY ER. AVINASH KULKARNI
PRESERVATION OF CAPITAL
Preservation of capital is a conservative investment strategy where the primary goal is to preserve capital and prevent loss in the portfolio
This strategy necessitates investment in the safest short-term instruments such as government bonds, FD
Understanding of preservation of capital
1) investors hold their funds in various types of investments according to their investment objectives
2) objective strategy depends upon
Age of investor
Investment experience
Family responsibilities
Education
Annual income
3) drawbacks are inflations effect on return rates from safe investments over prolonged periods
Importance of Capital Preservation
1) safeguard your money usually for short term
2) growth is not the primary goal
3) at an older age, preserving cash and capital is more important
4) capital preservation gives up large potential returns in exchange for security and stability
Capital preservation & Income generation
1) capital preservation seeks maximum safety & stability for your principal by focusing on securities and investments that carry a low degree of risk
2) Income generation focus on to generate dividend, interest or other income instead of, or in addition to, seeking a long-term capital appreciation
Low-risk Investments
1) high yield saving account
2) savings bonds
3) certificates of deposit
4) money market funds
5) government bills, notes, bonds
6) corporate bonds
7) dividend-paying stocks
8) preferred stocks
9) money market accounts
10) fixed annuities
Capital Growth
Capital growth or appreciation is an increase in the asset value or investment value over a time
Capital growth is measured by the difference between the current value or market value of an asset and purchase price over a time
Key factors of capital preservation
1) levels of risk and volatility
To avoid possible loss of value
2) safety and stability of investments
Minimum risk and the least volatility
3) generation of returns
Preserve current investments to cover living expenses in future
Limitations of Capital Preservation
1) Loss of availability
The risk associated with each investment strategy
2) very few to near-zero returns
Difficult to offer a good return due to the continued uncertainty and constantly fluctuating market conditions
3) Inflation
The investment ends up generating negative real returns after the adjustment of inflation rates
Inflation
Inflation is an economic concept that refers to increases in the price level of goods over an asset period of time
The rise in the price level signifies that the currency in a given economy loses purchasing power
Inflation = (difference in CPI of consecutive base years) / CPI of base year
Capital preservation through Real Estate
These investment properties hold the least risk relative to other strategies such as value-add and opportunistic
Determinants of the choice of capital preservation strategy
1) Sustainable growth rate
It is the maximum rate of growth that a company or social enterprise can sustain without having to finance
2) realized sales growth rate
This represents how much return investors have realized relative to the profit the company has
3) net operating return on invested capital
It expresses the after-tax, pre-financing profits of a business as q percentage of the capital invested by the business’s capital holders
4) weighted average cost of capital
It is a calculation of firms cost of capital in which each category of capital is proportionately weighted
Cash is an asset class with historically low yields
Preservation meaning
The process of saving something over a time
Goals of Capital preservation
1) investments must have direct and measurable benefits
2) financial goal is to preserve capital base at an inflation + expense adjusted basis
3) investing via intermediaries in order to achieve greater scale and to build infrastructure for other investors
4) in recession, the first rule of investing remains – don’t lose money
Compiled by:-
Er. Avinash Kulkarni
Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer
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