Should I Buy a House or Invest in My Business?

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Friday letters are usually dedicated to taking questions from our community. Do you have a question for us? Please feel free to send an e-mail to [email protected] or a DM to any of our social media channels.

Question

What is the difference between mutual funds and ETFs??

Answer?

Mutual funds and ETFs (Exchange Traded Funds) are similar.

They are both baskets of different investment assets sold as a single investment asset.?

They are like a candy jar mixed with different types of candies. Buying one candy jar means that you are buying all of the candies in that jar. This helps with diversifying your investment portfolio.?

In other words, you have diversified your risk into different risk assets.

There is however a difference between both. Mutual funds have their prices set once a day, and are overseen by portfolio managers.?

ETFs trade like stocks. Unlike Mutual Funds, ETFs have a passive investment style.?

It is important to note that the use of portfolio managers comes at a fee. This makes mutual funds appear more expensive than ETFs.

The main advantage an ETF has is that they are more affordable and you have more control over your investment because you can trade whenever you like as long as the market is open like an actual stock.

Question

What should I invest in with a medium- or low-risk appetite??

Answer

The first question should be, “What are your financial goals?”

Financial goals are objectives that you want your money to cover within a specific time. This goal could either be a short- or long-term goal.?

Examples of low-risk investments include savings, fixed deposits, treasury bills and government bonds.?

Real estate and corporate bonds fall under medium-risk investments.

It is important to note that risks and returns go hand in hand. The higher the risk, the higher the returns, and vice versa.

Question?

How do I invest in gold or silver?

Answer?

Investing in precious metals can seem very scary and difficult but there are ways to go about this.

First, we have the physical bullion which is buying the actual metal. It is advisable that you are careful while doing this. This is because the quality could vary. A purity of 99% and above is highly recommended.

Purchasing Gold or Silver ETFs (also known as paper gold/silver) is another way to invest in these precious metals. This purchase allows you to invest in an ETF that has shares in a bunch of gold mining companies or holds physical gold.?

Question?

A friend of mine earns ?5 million profit? monthly from her business. She wants to buy a house valued at ?100 million with a bulk of her savings. Should she throw all her savings back into her business or buy the house?

Answer?

There are a number of factors to consider in this scenario: age, risk appetite, family responsibilities, current investment assets and volatility of the business.?

A younger and single person for example most likely has less responsibilities and can take up more risks than an older and married person.?

Knowing the person’s current investment assets would help to gauge the person’s possible income stream. Also, investing in a business model that is exposed to high volatility would make a real estate investment more attractive.

The key factors to consider before making a decision among these two factors are as follows: nominal returns, real returns and the time it takes to recoup the invested capital.

Nominal returns refer to the returns that will be made from each option without taking into consideration the inflation rate.

Real returns refer to the returns that will be made from each investment option by taking into account the rate of inflation. Assuming a return of 20%, taking into consideration an inflation rate of 12%, the eventual real returns will amount to 8%.

The time it takes to recoup the invested capital is also important to consider. The longer it takes to recoup one’s capital from an investment, the less desirable the investment.

Question

I was able to get my retirement gratuity of ?10 million. I have the funds in a current account, and I was advised to keep some of the money in a fixed account. I would, however, like to know what other investment assets I can put the money in to yield profit.

Answer

Considering the circumstances surrounding the availability of the funds, it is advisable that one goes for low-risk assets.?

Low-risk investment options include: treasury bills, bonds and an interest yielding savings account.

Treasury bills are a form of investment asset that allows one to lend some money to the government in return for an interest payment called coupons. Treasury bills have a maturity of 'a' days, 'b' days and 'c' days. Go research.

Bonds have a maturity date that span beyond a year.

Interest yielding savings accounts offer interest payments on your savings.?

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