What are the Objectives of investment?
A prudent and consistent saving habit lets income earners to set aside a certain amount of current income for future consumption. Savings kept as cash do not result in an incremental return. Hence, savings are invested in assets with the desired risk-return characteristics.
The main objective of an investment process is to minimize risk while simultaneously maximizing the expected returns from the investment and assuring safety and liquidity of the invested assets. Investors look for growth/increase in current wealth through investment opportunities. Given an investment environment, an investor’s preference will be for investment opportunities that give the highest return.
Investors desire to earn as large returns as possible but with the minimum of risk. Risk can also be stated as the probability that the actual return realized from an investment may be different from the expected return. Financial assets can be grouped into different classes of risk based on the return. Government securities constitute the low-risk category as there is very little deviation from expectations and hence are riskless.
Shares of corporate entities would form the high-risk category of financial assets as their returns depend on many uncontrollable factors. An investor would be prepared to assume a higher risk only if the expected return is proportionately higher. Hence, there is a trade-off between risk and return.
The objective of safety and liquidity helps an investor to design a retirement plan. This is done to substantiate an investor’s earnings beyond the employment tenure. With this in mind, the investor sets aside a part of the current income in growth/income-yielding assets that would give an assured return after a period of time. Savings kept as idle cash does not become investments since it loses its value over time due to rise in prices.
This rise in prices, or inflation, invariably erodes the value of money. Investments are, hence, made with the objective to provide a hedge or protection against inflation over the investment duration. This time value concept necessitates investors to choose asset types that will enable them to retain at least the cash value held at present over a future period.
In effect, the real rate of return would be negative if the investment cannot earn a higher return than the inflation rate. For example, if inflation is at an average annual rate of 4 percent, then the expected return from an investment should be above 4 percent to help save funds to flow into investment avenues.
The objective of investment hence can be stated as giving an expected return from the asset that is higher than the prevailing inflation rate in the economy. The third objective of the investment is the utilization of tax incentive schemes offered by the government. In order to foster investment habits, many economies offer incentives in the form of tax-saving schemes.
Tax rates are applicable for a fiscal year; therefore, to cut down on immediate tax expenditures as an investor would invest in tax saving investment schemes offered by the government. This objective of the investor to reduce present tax payments and hence invest in tax-saving schemes can be considered as a short-term investment objective. Tax-saving schemes also offer a marginal return to the investors. Based on the tax policies of the country, investment criteria could solely depend on this factor also.
The main objective of an investment process is to minimize risk while simultaneously maximizing the expected returns from the investment and assuring safety and liquidity of the invested assets. Investors look for growth/increase in current wealth through investment opportunities. Given an investment environment, an investor’s preference will be for investment opportunities that give the highest return.
Investors desire to earn as large returns as possible but with the minimum of risk. Risk can also be stated as the probability that the actual return realized from an investment may be different from the expected return. Financial assets can be grouped into different classes of risk based on the return. Government securities constitute the low-risk category as there is very little deviation from expectations and hence are riskless.
Shares of corporate entities would form the high-risk category of financial assets as their returns depend on many uncontrollable factors. An investor would be prepared to assume a higher risk only if the expected return is proportionately higher. Hence, there is a trade-off between risk and return.
The objective of safety and liquidity helps an investor to design a retirement plan. This is done to substantiate an investor’s earnings beyond the employment tenure. With this in mind, the investor sets aside a part of the current income in growth/income-yielding assets that would give an assured return after a period of time. Savings kept as idle cash does not become investments since it loses its value over time due to rise in prices.
This rise in prices, or inflation, invariably erodes the value of money. Investments are, hence, made with the objective to provide a hedge or protection against inflation over the investment duration. This time value concept necessitates investors to choose asset types that will enable them to retain at least the cash value held at present over a future period.
In effect, the real rate of return would be negative if the investment cannot earn a higher return than the inflation rate. For example, if inflation is at an average annual rate of 4 percent, then the expected return from an investment should be above 4 percent to help save funds to flow into investment avenues.
The objective of investment hence can be stated as giving an expected return from the asset that is higher than the prevailing inflation rate in the economy. The third objective of the investment is the utilization of tax incentive schemes offered by the government. In order to foster investment habits, many economies offer incentives in the form of tax-saving schemes.
Tax rates are applicable for a fiscal year; therefore, to cut down on immediate tax expenditures as an investor would invest in tax saving investment schemes offered by the government. This objective of the investor to reduce present tax payments and hence invest in tax-saving schemes can be considered as a short-term investment objective. Tax-saving schemes also offer a marginal return to the investors. Based on the tax policies of the country, investment criteria could solely depend on this factor also.
No comments: