Question

Assume that you have substantial more cash than you would possibly need. You are thinking about investing the excess funds in some securities based on the information below.

• The economic condition is expected to be favorable over the next year.
• You are 28 years old and risk averse.
• The fifty percent of the excess funds will be used to pay for your mortgage every six months and the other fifty percent will be invested for your children's education, your retirement, etc.

How to form an investment portfolio to meet your short-term and long-term goals? Discuss and explain the potential money market and capital market securities that you'd like to select.

Answer 1

1. To meet the short term obligation of mortgage payment every six months, 50% of the excess funds can be invested in any short term bond or invest the excess funds in 6 month bank deposit. The returns are risk free with interest earned. On maturity, the amount can be withdrawn to pay the mortgage payment.

To meet the long term objectives, the remaining excess funds can be invested in capital market securities of any blue-chip stocks to avoid risk or the part of the excess fund can also be invested in any interest paying term deposits. The interest received can be invested in any long term mutual funds in which the funds are allocated to diversified stocks. The mutual fund investments require smaller amounts unlike huge one time investments, so the interest gained on term deposits would be sufficient to do the mutual fund investments.