Would you want to keep your hard earned money idle or would you like to earn some interest on that money? Well, it's no brain teaser. Most of us will choose the latter option. You invest your money to earn returns. Investments come in a variety of forms but most people use what is known as investment instruments like stocks, mutual funds, fixed deposits, etc.
While you may have several investment options available to you, you invest according to your investment objectives and consider various factors like the risk that you are willing to take. Let us understand more about these objectives and factors.
Investment Objectives
Investment objectives are related to what the client wants to achieve with the investments portfolios. Generally, the objectives are concerned with risk and return, which are interdependent, as the risk that you are willing to take, will determine your returns.
For example, if an elderly widow with little income, wants to invest her life’s savings. She will primarily be concerned with safety and income. Whereas, a young single lawyer, with a healthy income and relatively few financial obligations will be more interested in pursuing growth through her investments.
There are four types of investment objectives:
1. Safety of Capital
While there is no such thing as an absolutely safe and secure investment or one that is completely risk free. If your primary objective is safety, you will look for investments that have a minimal risk level. But then, the safest investments tend to have the lowest rates of return and may not even keep up with inflation. Safe investments include government issued securities, money market instruments and securities guaranteed by banks.
2. Income
If your primary objective is income, you will have to sacrifice a degree of safety in order to increase your returns. Even the most conservative investors like to have some level of income in their portfolios just to keep up with the rate of inflation. Eg: investing in stock markets earns a higher return but with higher risk.
3. Growth
If you are growth oriented, you would normally be less concerned with safety, and do not totally depend on income from investment funds. These types of investments in growth instruments are more likely to fluctuate in value and might have a greater risk of loss.
Higher risk investments may have greater long term rewards, but in the meantime you will probably see some ups and downs. It is important to be prepared and be aware of this in advance.
Eg: Investments in shares of publicly traded companies are usually associated with growth and are generally considered high risk investments.
4. Tax Savings
Income generated by common shareholders is considered capital gains and is taxed differently. Taxes on capital gains are significantly lower than taxes on interest income or ordinary income like salary. If your primary objective is tax-saving, registered plans such as national pension schemes and tax free savings accounts are the best bet. However, there are also effective ways to earn good returns along with saving taxes like investing in tax saving mutual funds or life insurance policy.
