There are lots of terms used in finance that can be confusing. This is not something that people should feel ashamed of, as it is a highly specialised field.
If you seek out the services of someone offering investment planning in Shropshire or wherever you happen to be based, one term that may come up is ‘capital growth strategy.’ It is something that can be applicable to both companies and individuals.
In this piece, we will be taking a closer look at what a capital growth strategy is and how you can benefit from adopting one.
What is meant by the term ‘capital growth strategy’?
To put it simply, a capital growth strategy means a plan for increasing the amount of capital that a business or an individual has through the use of careful investing. As the name suggests, the aim of it is to build on the sum of money that the client has at the beginning of the process so that they have a larger amount at the end of it.
It is typically a long-term rather than short-term strategy that involves working alongside a qualified expert in investments, such as a financial advisor. That enables either the business or the individual to put together a properly balanced portfolio of investments for growing their capital that avoids both excessive risk and too much caution.
While most companies will have some sort of plan in place for the future, it is not necessarily a capital growth strategy. That term refers to a particular type of investment plan.
What is a capital growth investment plan?
A capital growth strategy is a form of investing that usually involves quite a high level of risk in return for potentially significant profits. In this sense, it has some similarities with an aggressive growth strategy. It is a way of growing capital that best suits people or companies that are able to absorb high degrees of risk.
Those who seek out this sort of strategy are generally already achieving healthy profits and revenues, but are in need of further capital for expanding their businesses, making acquisitions or for investment. That is what a capital growth strategy is designed to help them achieve.
When you speak to your investment manager about such a strategy they will raise the subject of asset classes. This means things you can invest in to grow your capital and covers a number of different areas, including:
• Equities
• Property
• Investment funds
• Bonds
Most capital growth strategies incorporate more than one type of asset class, because some are riskier than others.
What are some common capital growth strategies?
Equity allocation
One very common form of capital growth strategy is to allocate the majority of the business’s or individual’s capital to equities – usually common stocks. Typically around two thirds of them go into this. However, because these can be a high risk type of investment, a wealth manager or financial advisor will often suggest investing the remaining third in cash, bonds or other fixed-income securities.
This risk mitigation is where a capital growth strategy differs from an aggressive growth strategy. The latter often involves putting all funds into the equities’ asset classes, maximising both risk and potential reward.
Property
There can be two approaches to investing in property as a way of growing your capital. The first is to buy residential or commercial property as an asset that can be rented out to individuals or businesses as an additional income source.
The second is to engage in refurbishing and/or expanding existing properties that you own. That could mean either commercial premises or a home. The sort of work that is covered by this includes things like extensions, repairs, landscaping and painting. The idea behind this is that these enhancements make the property more valuable, maximising the profit that you will make if and when you decide to sell it.
Investment funds
Exchange traded funds (ETFs) or mutual funds are a third potential capital growth strategy. Many companies like these because they offer a measured way of growing your capital. They are made up of bonds and stocks, but it is best to get the advice of a professional before putting your capital into one.
Should you opt for a capital growth strategy?
A capital growth strategy has a number of advantages. It has the potential to increase your personal or business wealth by creating an investment portfolio that delivers consistent revenues. It can also be useful for tax mitigation purposes.
There are disadvantages too, of course. Most capital growth options range from high risk to medium risk, so you must be able to absorb any losses. They also tend to pay off more over the long term, which can leave you facing short term issues with cash flow.
Speak to a financial professional for further advice.
