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“PRESERVATION OF CAPITAL”-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI

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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