Investing is parting with one’s fund, to be sued by another party, user of a fund, or for productive activity. It means giving an advance or loan or contributing to the equity or debt capital of a corporate or non-corporate business unit.
In ordinary everyday language, the term investment means the purchase of any income yielding asset, such as securities (stocks, mutual funds, and bonds) or real estate.
The assets themselves are also referred to as investments.
There are so many factors influencing an investment decision in portfolio management.
Factors Affecting Investment Decisions of Investors
The various factors that affect investors decision are given below:
1. Return on Investment
The main reason for people investing money is to earn a high return on investment.
An individual has to periodically analyze the rate of return that is being earned from various investments.
The portfolio of the investments may have to be readjusted depending on the rate from each of the investments.
This will help the investor to earn an increased rate of return from various investments.
2. Inflation
Each of the person’s investments has to beat the inflation rate present at that time for the return on investment to be positive.
If the inflation rate is more than the return on the investment of a person, then the return is negative when inflation is taken into consideration.
Any investment has too beat the inflation to be efficient.
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3. Liquidity
The benefits had to understand the need to have money in hand for either an emergency or even a sudden change in investment strategy to earn a high rate of return on the investment.
The equity market can have a sudden knee jerk reaction to any news and may create a buying opportunity.
If this has to be used, the individual should have enough liquidity to invest in time.
Liquidity is a very important factor in any prudent investment. People who invest without liquidity are likely to lose many golden opportunities that present from time to for investment.
4. Tax Benefits
Tax benefits are a very important aspect to be considered when a person is investing.
Tax can wipe away the return on investment if the investment is not done wisely.
There are various investment options that are taxed highly. There are other investments for which the returns are either not taxed or have a low tax.
The individual has to understand the tax laws of the land and invest accordingly to make a high return on investment.
5. Frequency of Return
The frequency with which the individual gets a return on his investment is also very important.
These have to be very carefully followed for efficient reinvestment and also for the use of the return for various needs of the individual.
A part of the returns on investment can be reinvested and the rest of the money should be used for any needs that may crop up.
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6. Risk in Investment
Risk means, a possibility of meeting danger or suffering harm. It can be defined as the change that the expected or prospective gains or profits may not materialize.
Risk is the estimation of the degree of the happening of the loss. It is a measurable element.
The difference between the actual outcome of investment and the expected outcome of the investment.
Basically every investor likes to reduce the risk and maximize his return on his investment.
Risk can be avoided by selecting some risk-free investment.
However, some risks can be controllable and others cannot be.
The risk may be raised by various factors such as wrong decision, wrong timing of investment, type of instrument, the quantum of amount, method of investment, nature of the industry, national and international factors.
7. Safety in Investment
Safety is the most important factor in making investment decisions.
The selected type of financial asset should be available under a regulatory framework. Investment means just parking o one’s own life fund in a safe place.
If the investment is made in a highly regulated environment, adds a flavor of safety.
Investment in government assured securities provides more safety than with private business concerns.
High safety parking places can be ranked as bank deposits, government bonds, UTI units, non-convertible debentures, convertible debentures, equity shares, and deposits with non-banking finance companies.
However, a highly safe investment will generate relatively low returns.
8. Yield
The yield of an instrument is the return earned from ut by way of interest, dividend, and capital appreciation.
Some instrument does not pay interest and its redeemed at face value.
The yield of an instrument is measured in post-tax terms.
9. Maturity of Investment
It is the life of a financial instrument.
While some instruments have fixed original maturities, others can have tailor-made maturity like a certificate of deposit.
Generally the longer the maturity, the greater the yield.
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