Characteristics of Good Investment

CHARACTERISTICS OF GOOD INVESTMENT

a. Objective fulfillment

∑    An investment should fulfill the objective of the savers. Every individual has a definite objective in making an investment. When the investment objective is contrasted with the uncertainty involved with investments, the fulfillment of the objectives through the chosen investment avenue could become complex.

b. Safety

∑    The first and foremost concern of any ordinary investor is that his investment should be safe. That is he should get back the principal at the end of the maturity period of the investment. There is no absolute safety in any investment, except probably with investment in government securities or such instruments where the repayment of interest and principal is guaranteed by the government.

c. Return

∑    The return from any investment is expectedly consistent with the extent of risk assumed by the investor. Risk and return go together. Higher the risk, higher the chances of getting higher return. An investment in a low risk - high safety investment such as investment in government securities will obviously get the investor only low returns.

d. Liquidity

∑    Given a choice, investors would prefer a liquid investment than a higher return investment. Because the investment climate and market conditions may change or investor may be confronted by an urgent unforeseen commitment for which he might need funds, and if he can dispose of his investment without suffering unduly in terms of loss of returns, he would prefer the liquid investment.

e. Hedge against inflation

∑    The purchasing power of money deteriorates heavily in a country which is not efficient or not well endowed, in relation to another country. Investors, who save for the long term, look for hedge against inflation so that their investments are not unduly eroded; rather they look for a capital gain which neutralizes the erosion in purchasing power and still gives a return.

f. Concealabilty

∑    If not from the taxman, investors would like to keep their investments rather confidential from their own kith and kin so that the investments made for their old age/ uncertain future does not become a hunting ground for their own lives. Safeguarding of financial instruments representing the investments may be easier than investment made in real estate. Moreover, the real estate may be prone to encroachment and other such hazards.

h. Tax shield

Investment decisions are highly influenced by the tax system in the country. Investors look for front-end tax incentives while making an investment and also rear-end tax reliefs while reaping the benefit of their investments. As against tax incentives and reliefs, if investors were to pay taxes on the income earned from investments, they look for higher return in such investments so that their after tax income is comparable to the pre-tax equivalent level with some other income which is free of tax, but is more risky.