Wednesday, May 5, 2010

6 Investment Alternatives That Are Within Your Budget (Part 2)


4. Diversified portfolio funds

Diversification works by investing in different kinds of securities in various industries with the goal of reducing or minimizing risk. By “putting your eggs in more than one basket,” you avoid complete and utter ruin when an event adversely affects a specific asset class or industry. And the easiest and most cost-effective way of achieving diversification is by investing in diversified funds like unit investment trust funds and mutual funds.

I’ve already exhaustively discussed unit investment trust funds in two previous posts (here and here). UITFs and mutual funds are basically the same thing, although the organization (a UITF is an investment provided by banks, while a mutual fund is an independent corporate entity regulated by the SEC) and participation (UITF participation involves buying shares of the fund, while mutual fund participation involves buying shares of stock of the mutual fund) are different.

All types of UITFs and mutual funds are basically already diversified, although some are more diversified than others. Money market funds and equity funds are invested in different individual securities in the same asset class, so they are diversified within an asset class (marketable securities or stocks) but not across asset classes. “Balanced” UITFs or mutual funds typically consist of 50% bonds and 50% stocks, which means the funds cover a broader scope of assets and are therefore better diversified. But for these funds, even if diversification is able to reduce risk considerably, there’s still a very real chance of principal loss because of the significant exposure to highly volatile stocks.

5. Stocks

I’ve already written a primer about stock investing and there are several posts about stock investing strategies (here, here, and here). If you want an already diversified portfolio of stocks, you can always just invest in equity UITFs or mutual funds; some investors, though, find the thrill and challenge of investing in individual stocks more appealing. Your 100,000 is more than enough to let you invest in up to 20 stocks, so you can still achieve diversification if you want to do it on your own.

6. Business Franchise

Franchising provides investors with access to “turnkey” small businesses. There are two important roles in franchise transactions: the franchisor is the owner and operator of the business that is being franchised; you, the investor, are the franchisee who will pay for the right to operate the business and use brands and trademarks and other things related to the enterprise.

Why do you even have to invest in a franchise (and spend more money) when you can do it on your own? Generally, investing in a franchise is more convenient and less risky than starting from scratch and putting up a similar business on your own; ideally, the business should already have an established market and strong brand equity before the franchisor offers the franchise to outside investors.

But like other investments, franchises are no sure win: the success of the venture also highly depends on factors like your management skills, the strength and behavior of the market in your chosen location, and the soundness of the business model of your franchise. And unlike the other investment vehicles we’ve discussed earlier, which are more or less passive in nature, running a franchise business will eat up a significant portion of your time. But for the additional risk and hassle, the profit potential is also significantly higher.

For 100,000 pesos, you can buy a modest food stall or water refilling station franchise. Just make sure that the business plan of the franchisor is solid and that the business model makes sense.

So there you have it Alex, six investment alternatives that are within your budget. So where should you put your hard earned money?

As in all things, it depends. It depends on your personal peculiarities, tastes, and circumstances. In a future post, I’ll talk about these factors and considerations in greater detail. For now, knowing what’s out there will have to do.

Click here for Part 1.
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