Recommendations
Based on the analysis of the firm’s criteria regarding its short-term investment options, the two main options that the firm may consider are Treasury Inflation-Protected Securities (TIPS) and Brokerage Money Market Mutual Funds. Each of these investment options may have favorable returns for the firm considering that they would seek to protect the firm’s investment while guaranteeing an income within the short-term provision. Treasury Inflation-Protected Securities (TIPS) refer to marketable securities, which aim to ensure that investors are protected from the risk of inflation while providing that their principals change depending on the consumer price index (d’Amico, Kim, & Wei, 2018). For the firm, this would mean that its investment in TIPS would not only serve towards ensuring that it is protected from inflation but also serves as a guarantee of providing that the firm builds on its ability for maximizing investment.
On the other hand, Brokerage Money Market Mutual Funds refer to a pool of investors' savings, which allow for fixed-income investments that seek to ensure that the investors are not only guaranteed a steady income but may also be able to redeem their investments at any time (Haghani Rizi, Kishor, & Marfatia, 2018). In this case, the firm may need to consider the pool that it will invest in, as this would serve as one of the ways through which to define overall efficiency, as well as, a maximization of expected profit margins. The decision between these two options for short-term investment would depend wholly on the anticipated rate of return, as well as, the risks that the firm is likely to encounter concerning its decision to invest. That decision will be viewed from multiple perspectives to determine the viability of the short-term investments.
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Investment Assets and Parameters
The firm's investment in TIPS will seek to build on its structured approach through which to define its ability to maximize on the inflation rate in the country, which would serve as a critical aspect of consideration in achieving positive investment outcomes. Stillwagon (2018) argues that TIPS allows investors to gain from their investments based on the rate of inflation, which means that the higher the rate of inflation, the higher an investor is likely to earn from an investment. In this case, the firm may need to consider the inflation rate, which has been changing significantly within the last few years. From the economic data available, the rate of inflation was 0.7% in 2015, 2.1% in 2016, 2.1% in 2017, and 1.9% in 2018, which can be seen as critical parameters that determine returns on investment.
In the case of brokerage money market mutual funds, the principal investment asset to consider is the investor fund pool, which would serve as a critical determinant of the expected rate of return based on the investments made by the firm. It is essential for the firm to consider the fact that for it to have a higher rate of return, it must focus on the lowest-volatility types of investment. These types of investment serve as a critical determinant of the fact that the company would be expected to shift its positioning towards advancing a general approach through which to achieve a higher investment outcome. Based on the current rates of return, it can be noted that the firm is likely to get a return of between 2.5% and 3.5%, which would be viewed as being minimal risk for the firm.
Upside and Downside of Each Investment
When considering investment in TIPS, the significant first upside to note is that it involves professional management where the fund managers seek to add value to the investments occurring within the secondary markets. Another key upside is that TIPS offers a framework for diversification concerning the investment options, which means that investors are likely to gain significantly from their investments. Lastly, TIPS offers convenience, which means that this is an investment option that does not require constant monitoring to define possible expectations from the investment. Regarding the downside, TIPS is considered as being very volatile considering that it relies on the consumer price index, which changes significantly within a given period. On the other hand, the fees associated with management TIPS are notable high when compared to other investment options, which seeks to reduce its investment outcomes and expectations.
The main upside associated with brokerage money market funds is that it helps in minimizing volatility within the market structure, which serves as a critical factor of consideration in reducing risks. That means that an investor is likely to gain a higher rate of return regardless of the volatility occurring within the market, which may have severe implications for the expected investments. The significant other upside is that this investment tends to offer a higher rate of liquidity, which would mean that the firm would be able to redeem its investment at a faster rate if it would want to pull out. Regarding its downside, this investment option limits purchasing power held by the investor, which means that it would be much harder for the firm to determine the investments that the funds would consider.
Returns for Investment
If the firm considered TIPS as its preferred investment, the effective annual rate would be 1.9% of its $2.5 million investment. That means that the firm would gain a return of $2,547,500 as its annual return for its investment in TIPS. The performance would seek to factor the inflation rate, which would be considered as the only aspect that defines the possibility of return.
If the firm considered brokerage money market funds as its preferred investment, the effective rate of return would be 2.6% of the $2.5 million investment. From the calculations, it can be noted that the firm is likely to get an investment return of $2,565,000 from its investment. The main advantage of this is that the firm is guaranteed of this return considering that this investment option minimizes volatility in the market returns for given investments.
Conclusion
In summary, the firm may need to consider two short-term investment options, each of which is likely to have favorable outcomes regarding maximizing on its investment. These two options are Treasury Inflation-Protected Securities (TIPS) and Brokerage Money Market Mutual Funds. From the analysis of the two investment options, the second option, brokerage money market mutual funds, is viewed as the best option, as it not only guarantees a higher rate of return for the investment but also minimizes risks of investment. That is one of the critical aspects that the firm would need to consider, as investment options that pose a higher risk outcome tend to pose a significant challenge concerning the guarantee of return.
References
d’Amico, S., Kim, D. H., & Wei, M. (2018). Tips from TIPS: the informational content of Treasury Inflation-Protected Security Prices. Journal of Financial and Quantitative Analysis , 53 (1), 395-436.
Haghani Rizi, M., Kishor, N. K., & Marfatia, H. A. (2018). The dynamic relationship between the money market mutual funds, the commercial paper market, and the repo market. The European Journal of Finance , 1-20.
Stillwagon, J. R. (2018). TIPS and the VIX: Spillovers from financial panic to breakeven inflation in an automated, nonlinear modeling framework. Oxford Bulletin of Economics and Statistics , 80 (2), 218-235.
