Question

1a Chris is looking to save for a £4,000 deposit towards buying a canal boat in 6 years. He has £500 lump sum already and is willing to add another £30 per month. Using the Borrowing and saving calculator, calculate the annual return he would need to seek from a saving product in order to reach his goal.

1b Explain which sort of financial product would be suitable for this saving strategy.

1c Briefly explain another way that Chris could save the amount of his deposit if he is risk-averse or doesn’t have much risk capacity.

Answer 1

1a) Let the return required be r per month (i.e. 12r per year compounded monthly) for 6*12 = 72 months

then future value of 500 lump sum and the annuity should be 4000

500*(1+r)^72 + 30/r*((1+r)^72-1) = 4000

Using SOLVER , r =0.009141 per month or 10.97% p.a. (monthly compounded)

b) Investment in Equity products can yield such type of returns and hence equity investments (in shares of companies) may be suitable for this saving strategy

c) If the investor is Risk averse or doesn’t have much risk capacity, the Investor can opt for Mutual Funds which are professionally managed and hence have lesser risk or the investor has to increase his monthly deposits or increase the time duration.